For most people the honest answer is this: going limited usually starts to pay once your profits are comfortably into the higher-rate territory — very roughly from around £30,000–£50,000 of annual profit upwards — and especially if you don't need to draw every penny out straight away. Below that, the tax savings are often small and can be swallowed by the extra accountancy and admin a limited company brings. Above it, the gap widens. But "worth it" isn't only about tax — limited status also gives you limited liability and added credibility — and the right number depends entirely on your circumstances. This guide explains how each structure is taxed in 2026/27, where the tipping point tends to sit, and when staying a sole trader is the smarter call.
The figures below are for the 2026/27 tax year (6 April 2026 to 5 April 2027) and apply to England, Wales and Northern Ireland; Scotland sets its own income-tax bands. They're sourced to gov.uk and dated — tax rates change at each Budget. Treat this as guidance, not personal advice: the only way to know your number is to run it on your figures, which is exactly what a good accountant does.
How a sole trader is taxed
As a sole trader, you and the business are the same legal person. You pay Income Tax and Class 4 National Insurance on all of your profit, whether or not you take it out — there's no separation between business and personal money.
For 2026/27 the Income Tax bands (rUK) are:
Band
Taxable income
Rate
Personal Allowance
Up to £12,570
0%
Basic rate
£12,571 – £50,270
20%
Higher rate
£50,271 – £125,140
40%
Additional rate
Over £125,140
45%
On top of Income Tax, a sole trader pays Class 4 National Insurance of 6% on profits between £12,570 and £50,270, then 2% above that (gov.uk). Class 2 NIC no longer has to be paid once profits reach £7,105 — it's treated as paid to protect your State Pension record. The structure is simple and cheap to run, which is its main appeal.
A limited company is a separate legal entity. The company makes the profit, pays Corporation Tax on it, and then you decide how to take money out — usually as a small salary plus dividends. That two-step structure is where the potential saving comes from.
When you draw profit as dividends, you get a £500 tax-free dividend allowance, and dividends above it are taxed at 10.75% (basic-rate band), 35.75% (higher-rate band) or 39.35% (additional rate) (gov.uk). The key advantage: dividends don't carry National Insurance, unlike a sole trader's profits or an employee's salary. The catch for 2026/27 is that the two main dividend rates rose by 2 percentage points from 6 April 2026 (from 8.75% and 33.75%), which narrows the gap that used to make incorporation a near-automatic win.
Where the tipping point sits
There's no single magic number, because it depends on how much profit you make and how much of it you actually need to take out. But the direction of travel is consistent:
Below ~£30,000 profit: the tax difference is usually small. Once you add accountancy fees and the extra admin (below), going limited often isn't worth it on tax alone.
~£30,000–£50,000: a saving usually appears, mainly because part of your income can come out as NIC-free dividends rather than NIC-bearing self-employed profit. Whether it's worth the extra cost depends on your circumstances.
Above ~£50,000, and especially if you can leave some profit in the company: the case strengthens. Retaining profit in the company (taxed at 19%) rather than drawing it all and paying higher-rate tax personally is one of the biggest levers — but only if you don't need that cash now.
To put the sole-trader side in real numbers: a sole trader on £60,000 profit in 2026/27 would pay roughly £11,432 Income Tax (£37,700 at 20% plus £9,730 at 40%) and about £2,457 Class 4 NIC — a little under £13,900 in total, leaving around £46,100. The limited-company route at the same profit can beat that, but the size of the gap swings on your salary/dividend split, whether you retain any profit, and your wider income — which is why a personalised calculation matters. (Illustrative, 2026/27 rUK rates; your figures will differ.)
Tax is only one side of the ledger. A limited company brings real obligations a sole trader doesn't have:
Companies House filings and fees. Incorporating online costs £100 from 1 February 2026 (up from £50), and you file a confirmation statement every year for £50 (gov.uk).
Annual accounts and a Corporation Tax return, plus director responsibilities and a separate business bank account.
Higher accountancy fees, because there's more to do — which is the main running cost that eats into the tax saving at lower profits.
Public record: your company's details and accounts are visible on the Companies House register.
This is the honest reason the tax saving has to be big enough to clear the extra cost before going limited makes sense.
When it's better to stay a sole trader
Going limited is not always the right move. It usually isn't worth it if:
Your profits are modest (broadly under ~£30,000) and likely to stay there.
You need to draw all your profit to live on, so you can't benefit from retaining money in the company.
You value simplicity and want to avoid the filing, deadlines and cost.
Your work is short-term or a side project you're not sure will continue.
If two or three of those describe you, the simpler sole-trader route may leave you better off once costs and time are counted.
It's not only about tax
Two non-tax reasons often tip the decision regardless of the maths:
Limited liability. As a sole trader, your personal assets are exposed if the business runs into debt or a claim. A limited company is a separate legal entity, so — with some director-duty exceptions — your liability is generally limited to what you've put in.
Credibility and opportunity. Some clients, agencies and contracts prefer (or require) you to operate through a limited company. For contractors and freelancers, "Ltd" can open doors a sole trader can't.
So — should you go limited?
If your profits are heading north of roughly £40,000–£50,000, you don't need to extract every penny, and you'd value the liability protection, going limited is likely to pay off. If you're below that, drawing everything you earn, and want the quiet life, staying a sole trader may well be the better-off option once costs are in. The only way to be sure is to run the numbers on your profit and how you'd take the money — and that's the part worth getting right.
Go Limited helps directors make that call and connects you with a trusted partner accountant who'll run the personalised comparison and, if you go ahead, handle the set-up. You can see how that works on our accountancy page, or grab the free limited company guide to weigh it up first.
At what point is it worth becoming a limited company?
As a rough guide, the tax case for going limited tends to appear from around £30,000–£50,000 of annual profit and strengthens above it — particularly if you can leave some profit in the company rather than drawing it all. Below that, extra accountancy and admin costs often cancel out the saving. Your exact tipping point depends on your figures, so it's worth getting a personalised calculation.
Is it better to be a sole trader or a limited company?
Neither is better in the abstract. A sole trader is simpler and cheaper to run and suits modest or uncertain profits. A limited company can be more tax-efficient at higher profits, offers limited liability, and can look more credible to clients — but it adds filings, costs and admin. The right answer depends on your profit level, how you take your money, and how much you value simplicity vs protection.
Do limited companies pay less tax than sole traders?
Often, but not always — and less than they used to. A company pays 19% Corporation Tax on profits up to £50,000, and dividends carry no National Insurance, which can beat a sole trader's Income Tax plus Class 4 NIC. But the two main dividend tax rates rose to 10.75% and 35.75% from April 2026, narrowing the gap, and a limited company costs more to run. The saving has to be big enough to clear those costs.
What are the disadvantages of a limited company?
More admin and cost: annual accounts, a Corporation Tax return, a £50 yearly confirmation statement, director duties, a separate bank account and usually higher accountancy fees. Your details and accounts are also public on the Companies House register. For low or uncertain profits, those downsides can outweigh the tax benefit.
Can I switch from sole trader to limited company later?
Yes. Many people start as a sole trader and incorporate once profits rise to the point where it pays. You set up the company, move the business across, and tell HMRC — an accountant can handle the transition so nothing falls through the cracks.
For most people the honest answer is this: going limited usually starts to pay once your profits are comfortably into the higher-rate territory — very roughly from around £30,000–£50,000 of annual profit upwards — and especially if you don't need to draw every penny out straight away. Below that, the tax savings are often small and can be swallowed by the extra accountancy and admin a limited company brings. Above it, the gap widens. But "worth it" isn't only about tax — limited status also gives you limited liability and added credibility — and the right number depends entirely on your circumstances. This guide explains how each structure is taxed in 2026/27, where the tipping point tends to sit, and when staying a sole trader is the smarter call.
The figures below are for the 2026/27 tax year (6 April 2026 to 5 April 2027) and apply to England, Wales and Northern Ireland; Scotland sets its own income-tax bands. They're sourced to gov.uk and dated — tax rates change at each Budget. Treat this as guidance, not personal advice: the only way to know your number is to run it on your figures, which is exactly what a good accountant does.
How a sole trader is taxed
As a sole trader, you and the business are the same legal person. You pay Income Tax and Class 4 National Insurance on all of your profit, whether or not you take it out — there's no separation between business and personal money.
For 2026/27 the Income Tax bands (rUK) are:
Band
Taxable income
Rate
Personal Allowance
Up to £12,570
0%
Basic rate
£12,571 – £50,270
20%
Higher rate
£50,271 – £125,140
40%
Additional rate
Over £125,140
45%
On top of Income Tax, a sole trader pays Class 4 National Insurance of 6% on profits between £12,570 and £50,270, then 2% above that (gov.uk). Class 2 NIC no longer has to be paid once profits reach £7,105 — it's treated as paid to protect your State Pension record. The structure is simple and cheap to run, which is its main appeal.
A limited company is a separate legal entity. The company makes the profit, pays Corporation Tax on it, and then you decide how to take money out — usually as a small salary plus dividends. That two-step structure is where the potential saving comes from.
When you draw profit as dividends, you get a £500 tax-free dividend allowance, and dividends above it are taxed at 10.75% (basic-rate band), 35.75% (higher-rate band) or 39.35% (additional rate) (gov.uk). The key advantage: dividends don't carry National Insurance, unlike a sole trader's profits or an employee's salary. The catch for 2026/27 is that the two main dividend rates rose by 2 percentage points from 6 April 2026 (from 8.75% and 33.75%), which narrows the gap that used to make incorporation a near-automatic win.
Where the tipping point sits
There's no single magic number, because it depends on how much profit you make and how much of it you actually need to take out. But the direction of travel is consistent:
Below ~£30,000 profit: the tax difference is usually small. Once you add accountancy fees and the extra admin (below), going limited often isn't worth it on tax alone.
~£30,000–£50,000: a saving usually appears, mainly because part of your income can come out as NIC-free dividends rather than NIC-bearing self-employed profit. Whether it's worth the extra cost depends on your circumstances.
Above ~£50,000, and especially if you can leave some profit in the company: the case strengthens. Retaining profit in the company (taxed at 19%) rather than drawing it all and paying higher-rate tax personally is one of the biggest levers — but only if you don't need that cash now.
To put the sole-trader side in real numbers: a sole trader on £60,000 profit in 2026/27 would pay roughly £11,432 Income Tax (£37,700 at 20% plus £9,730 at 40%) and about £2,457 Class 4 NIC — a little under £13,900 in total, leaving around £46,100. The limited-company route at the same profit can beat that, but the size of the gap swings on your salary/dividend split, whether you retain any profit, and your wider income — which is why a personalised calculation matters. (Illustrative, 2026/27 rUK rates; your figures will differ.)
Tax is only one side of the ledger. A limited company brings real obligations a sole trader doesn't have:
Companies House filings and fees. Incorporating online costs £100 from 1 February 2026 (up from £50), and you file a confirmation statement every year for £50 (gov.uk).
Annual accounts and a Corporation Tax return, plus director responsibilities and a separate business bank account.
Higher accountancy fees, because there's more to do — which is the main running cost that eats into the tax saving at lower profits.
Public record: your company's details and accounts are visible on the Companies House register.
This is the honest reason the tax saving has to be big enough to clear the extra cost before going limited makes sense.
When it's better to stay a sole trader
Going limited is not always the right move. It usually isn't worth it if:
Your profits are modest (broadly under ~£30,000) and likely to stay there.
You need to draw all your profit to live on, so you can't benefit from retaining money in the company.
You value simplicity and want to avoid the filing, deadlines and cost.
Your work is short-term or a side project you're not sure will continue.
If two or three of those describe you, the simpler sole-trader route may leave you better off once costs and time are counted.
It's not only about tax
Two non-tax reasons often tip the decision regardless of the maths:
Limited liability. As a sole trader, your personal assets are exposed if the business runs into debt or a claim. A limited company is a separate legal entity, so — with some director-duty exceptions — your liability is generally limited to what you've put in.
Credibility and opportunity. Some clients, agencies and contracts prefer (or require) you to operate through a limited company. For contractors and freelancers, "Ltd" can open doors a sole trader can't.
So — should you go limited?
If your profits are heading north of roughly £40,000–£50,000, you don't need to extract every penny, and you'd value the liability protection, going limited is likely to pay off. If you're below that, drawing everything you earn, and want the quiet life, staying a sole trader may well be the better-off option once costs are in. The only way to be sure is to run the numbers on your profit and how you'd take the money — and that's the part worth getting right.
Go Limited helps directors make that call and connects you with a trusted partner accountant who'll run the personalised comparison and, if you go ahead, handle the set-up. You can see how that works on our accountancy page, or grab the free limited company guide to weigh it up first.
At what point is it worth becoming a limited company?
As a rough guide, the tax case for going limited tends to appear from around £30,000–£50,000 of annual profit and strengthens above it — particularly if you can leave some profit in the company rather than drawing it all. Below that, extra accountancy and admin costs often cancel out the saving. Your exact tipping point depends on your figures, so it's worth getting a personalised calculation.
Is it better to be a sole trader or a limited company?
Neither is better in the abstract. A sole trader is simpler and cheaper to run and suits modest or uncertain profits. A limited company can be more tax-efficient at higher profits, offers limited liability, and can look more credible to clients — but it adds filings, costs and admin. The right answer depends on your profit level, how you take your money, and how much you value simplicity vs protection.
Do limited companies pay less tax than sole traders?
Often, but not always — and less than they used to. A company pays 19% Corporation Tax on profits up to £50,000, and dividends carry no National Insurance, which can beat a sole trader's Income Tax plus Class 4 NIC. But the two main dividend tax rates rose to 10.75% and 35.75% from April 2026, narrowing the gap, and a limited company costs more to run. The saving has to be big enough to clear those costs.
What are the disadvantages of a limited company?
More admin and cost: annual accounts, a Corporation Tax return, a £50 yearly confirmation statement, director duties, a separate bank account and usually higher accountancy fees. Your details and accounts are also public on the Companies House register. For low or uncertain profits, those downsides can outweigh the tax benefit.
Can I switch from sole trader to limited company later?
Yes. Many people start as a sole trader and incorporate once profits rise to the point where it pays. You set up the company, move the business across, and tell HMRC — an accountant can handle the transition so nothing falls through the cracks.
