Sole Trader vs Limited Company 2025/26

Sole trader vs limited company — which is more tax efficient?

The answer depends on your profit level. At lower profits, the difference is small and the simplicity of being a sole trader often wins. At higher profits — typically above £30,000-£40,000 — a limited company starts to become more tax efficient.

How a sole trader is taxed

As a sole trader you pay income tax on your profits at 20%, 40% or 45% depending on the level, plus Class 2 and Class 4 National Insurance. Tax is paid through Self Assessment each January.

How a limited company is taxed

A limited company pays corporation tax on its profits at 19% (small profits rate, up to £50,000) or 25% (main rate, above £250,000). As a director you typically pay yourself a small salary up to the personal allowance (£12,570) to avoid income tax and NI, then take the remaining profits as dividends.

Dividends are taxed at lower rates than income — 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate) — after the £500 dividend allowance.

Other factors to consider

• Admin costs — a limited company requires annual accounts filed at Companies House, a confirmation statement, and more complex bookkeeping. An accountant typically costs £800-£1,500 per year more than for a sole trader.
• IR35 — if you work through a limited company as a contractor, IR35 rules may apply. Use our IR35 Status Checker to assess your position.
• Credibility — some larger clients prefer to work with limited companies.
• Limited liability — as a sole trader your personal assets are at risk if the business has debts. A limited company provides a degree of protection.
• Pension contributions — a limited company can make employer pension contributions which are fully deductible against corporation tax, making pensions very efficient for Ltd directors.

When does a limited company make sense?

As a general guide, a limited company typically becomes more tax efficient when your profit exceeds around £30,000-£35,000 per year, assuming you take the optimal salary/dividend mix. Below this level, the tax saving is often outweighed by the additional accountancy costs.