Sole Trader vs Limited Company: When Is It Actually Worth Going Ltd?
The sole trader vs limited company decision used to be much easier from a tax perspective. There was a time when running a limited company could offer a much clearer tax advantage over operating as a sole trader.Today, the answer is far less straightforward.
Changes to Corporation Tax, dividend tax and National Insurance mean that incorporating purely to save tax does not always produce the result business owners expect.
So when does a limited company actually start to make sense and is there really a turnover figure at which you should make the switch?
Why limited companies used to have a bigger tax advantage.
For many years, one of the main reasons business owners considered moving from sole trader to limited company was tax efficiency. A company could pay Corporation Tax on its profits, while the owner could take a relatively small salary and withdraw additional profits as dividends.
Dividends were not subject to National Insurance, and historically the tax treatment of dividends was more generous than it is today. This often created a noticeable tax saving compared with paying Income Tax and National Insurance on the full profits as a sole trader.
That is where the familiar idea that “once you earn enough, you should go limited” came from.
But the tax landscape has changed and the old rule of thumb no longer works in the same way.
The important point: A limited company can still be the right structure for many businesses, but tax savings should no longer be assumed. The answer depends on your profit, how much money you need to take out of the company and your wider circumstances.
So what changed?
The limited company tax advantage has gradually narrowed. Three changes in particular have made the traditional salary-and-dividend strategy less attractive than it once was.
Dividend tax is higher.
Dividends are still not subject to National Insurance, but they are not tax-free. For 2026/27, the dividend allowance is only £500, and dividends above this are taxed at 10.75% for basic-rate taxpayers and 35.75% for higher-rate taxpayers.
This reduces the advantage of taking company profits as dividends rather than earning the same amount as a sole trader.
Corporation Tax is not simply 19%.
The 19% Corporation Tax rate still applies to companies with profits of £50,000 or less. Above £50,000, Marginal Relief applies, gradually increasing the effective rate until the 25% main rate applies to profits above £250,000.
This means a growing company cannot simply assume that all of its profits will be taxed at 19%
Employer's National Insurance costs more.
A company paying its director a salary may also have an Employer’s National Insurance liability. For 2026/27, the standard employer rate is 15% on earnings above the £5,000 Secondary Threshold.
That creates an additional company cost when using a salary-and-dividend strategy.
Tax rates used in this guide: 2026/27. Tax rules and individual circumstances can change the outcome, so the examples below are illustrative rather than personal tax advice.
Turnover isn't the number you should be watching.
One of the most common questions is: “At what turnover should I become a limited company?”
The problem is that turnover alone tells us very little about whether incorporating will save tax. What matters much more is how much profit the business actually makes after allowable business expenses.
£60,000 turnover
£60,000
Revenue
− £10,000
Allowable business expenses
= £50,000 PROFIT
This business has a relatively high profit margin. There is £50,000 of profit on which the tax position needs to be considered.
£60,000 turnover
£60,000
Revenue
− £30,000
Allowable business expenses
= £30,000 PROFIT
The turnover is identical, but this business has significantly less profit. Its tax position and the potential benefit of incorporating could therefore look very different.
£60,000 turnover: Sole trader vs limited company.
Let’s put the theory into numbers. Assume the same business generates £60,000 of turnover and has £10,000 of allowable business expenses, leaving £50,000 before the owner’s remuneration.
We’ll compare operating as a sole trader with a one-person limited company using a salary-and-dividend strategy.
For this example we assume:
- 2026/27 tax rates
- England, Wales or Northern Ireland taxpayer
- £60,000 turnover
- £10,000 allowable business expenses
- no other personal income
- no student loan
- no pension contributions
- one director/shareholder
- all available company profits are withdrawn
- no Employment Allowance
Business profit
£60,000 turnover
− £10,000 expenses
= £50,000 profit
Income Tax
£50,000 profit
− £12,570 Personal Allowance
= £37,430 taxable
£37,430 × 20%
= £7,486 Income Tax
Class 4 National Insurance
£50,000 − £12,570
= £37,430
£37,430 × 6%
= £2,246 Class 4 NIC
Total tax + Class 4 NIC: £9,732
Approx. amount remaining: £40,268
Profit before director’s salary
£50,000
Director salary
− £12,570
Employer’s National Insurance
Salary above £5,000 threshold: £7,570
£7,570 × 15% = £1,136
Company taxable profit
£50,000
− £12,570 salary
− £1,136 employer NIC
= £36,294
Corporation Tax at 19%
≈ £6,896
Available for dividends
≈ £29,398
Dividend Tax
Po uwzględnieniu £500 Dividend Allowance:
≈ £3,106
Corporation Tax + Employer NI + Dividend Tax: approx. £11,138
Approx. amount reaching the owner: £38,862
So which structure pays less tax at this level?
In this example, the sole trader is approximately £1,406 better off than the limited company owner after the taxes included in our calculation.
Sole trader: approx. £40,268 remaining
Limited company: approx. £38,862 reaching the owner
That is before considering the additional administrative and accountancy costs that can come with running a limited company.
This is an illustrative comparison, not personal tax advice. Different salary levels, other income, pension contributions, Employment Allowance eligibility, associated companies, retaining profits within the company and other circumstances can materially change the result.
Does a limited company become more tax-efficient as profits grow?
The £50,000 profit example shows that incorporating does not automatically reduce your tax bill.
To see the wider picture, we can apply the same assumptions to several different profit levels and compare how much the owner could retain as a sole trader and through a limited company.
Same assumptions as above: one owner/director, no other income, no pension contributions, no student loan, no Employment Allowance and all available company profits withdrawn.
Business profit
Sole trader
Owner retains
Limited company
Owner receives
Difference
Lower tax in this example
30000
£25,468
£24,403
£1,065
Sole trader
40000
£32,868
£31,633
£1,235
Sole trader
50000
£40,268
£38,862
£1,406
Sole trader
60000
£46,111
£46,091
£20
Sole trader
80000
£57,711
£55,890
£1,822
Sole trader
£30,000
BUSINESS PROFIT
Sole trader
£25,468 retained
Limited Company
£24,403 received
Difference
£1,065
LOWER TAX IN THIS EXAMPLE
Sole trader
£40,000
BUSINESS PROFIT
Sole trader
£32,868 retained
Limited Company
£31,633 received
Difference
£1,235
LOWER TAX IN THIS EXAMPLE
Sole trader
£50,000
BUSINESS PROFIT
Sole trader
£40,268 retained
Limited Company
£38,862 received
Difference
£1,406
LOWER TAX IN THIS EXAMPLE
Sole trader
£60,000
BUSINESS PROFIT
Sole trader
£46,111 retained
Limited Company
£46,091 received
Difference
£20
LOWER TAX IN THIS EXAMPLE
Sole trader
£80,000
BUSINESS PROFIT
Sole trader
£57,711 retained
Limited Company
£55,890 received
Difference
£1,822
LOWER TAX IN THIS EXAMPLE
Sole trader
There is no simple profit level at which a limited company suddenly becomes the more tax-efficient option.
In our examples, the sole trader retains slightly more at every profit level shown. At £60,000 the difference is almost negligible, but at £80,000 it widens again as higher dividend tax rates and Corporation Tax begin to affect the limited company calculation.
This is why choosing a limited company purely because your profits have reached a particular number can be misleading.
What if you don't need to take all the money out of the company?
The comparison above assumes that the owner withdraws all available company profits as salary and dividends.
But that is not how every limited company operates. If you do not need all of the profits for personal spending, you may choose to leave some money inside the company rather than paying it out immediately as dividends.
This can change the comparison significantly.
Taking all profits out
If you withdraw all available profits, the company may pay Corporation Tax and you may then pay personal tax when the remaining profits are distributed as dividends.
This is the scenario used in our comparison above.
Leaving profits in the company
If you do not need all of the money personally, some profits can remain in the company after Corporation Tax rather than being immediately distributed as dividends.
This can defer the personal dividend tax until money is actually distributed, leaving more funds inside the business for future costs, investment or growth.
This is where a limited company can become more interesting. The benefit is not necessarily a lower overall tax bill. It can be the flexibility to decide when profits are extracted personally and when they remain available within the business.
For example, a consultant who earns more than they need for their personal living costs may have very different reasons for incorporating from someone who needs to withdraw almost every pound the business earns.
Tax isn't the only reason to choose a limited company.
Tax is important, but it should not be the only factor when choosing a business structure. A limited company is a separate legal entity, and for some businesses the commercial and practical advantages can matter more than a small difference in tax.
Limited liability.
A limited company is legally separate from its owners. In many circumstances, this means the shareholders’ personal liability for company debts is limited, although personal guarantees and certain director responsibilities can still create personal exposure.
Commercial credibility.
Some clients, agencies and larger organisations prefer to work with limited companies or may require suppliers to operate through a company. Incorporation can therefore make sense for commercial reasons even where the tax saving is minimal.
More flexibility as the business grows.
A company structure can make it easier to introduce additional shareholders, change ownership or build a business that is legally separate from you personally.
Keeping money in the business.
If you do not need to withdraw all profits personally, a company gives you the option to retain funds after Corporation Tax for future business costs, investment or growth rather than distributing everything immediately.
These benefits do not mean that every growing business should incorporate. They simply show why the decision should be based on the wider needs of the business rather than on tax alone.
When staying as a sole trader may make more sense.
A limited company is not automatically the next step for every successful business. For some owners, remaining a sole trader can still offer the right balance of simplicity, flexibility and tax efficiency.
01. You withdraw most of what you earn.
If you need most of the business profits for your personal living costs, the ability to retain profits inside a company may offer little practical benefit. As our examples show, extracting all available profits through a company does not automatically result in a lower tax bill.
02. Your business is straightforward.
A sole trader structure generally involves less administration. There are no company accounts to file with Companies House, no Corporation Tax return and fewer rules around how money is taken from the business.
03. Limited liability is not a major concern.
For some low-risk service businesses, the additional legal separation offered by a company may be less important than it would be for a business with employees, significant contracts, borrowing or greater commercial risk.
04. You value simplicity.
As a sole trader, the business and owner are not legally separate. This makes taking money from the business more straightforward and generally means fewer ongoing company formalities to manage.
Staying as a sole trader does not mean your business is too small or unsuccessful. The right structure is the one that fits how your business operates, how much profit it makes and what you want to do with that money.
So, when is it actually worth going Ltd?
There is no single turnover or profit figure at which every sole trader should become a limited company.
If you need to withdraw almost all of your profits, incorporating purely for tax reasons may offer little or no advantage under current tax rates. Our examples show why the old rule of thumb that a growing business should automatically switch to a limited company can be misleading.
A company can become more attractive when you do not need to withdraw all of the profits, want to retain money for future investment, need limited liability, plan to introduce other shareholders or have commercial reasons for operating through a company.
The decision should therefore be based on the whole picture, not turnover alone.
Consider staying sole trader if:
simplicity matters • you withdraw most profits • your business risk is relatively low
Consider exploring Ltd if:
you can retain profits • limited liability matters • the business is growing in complexity • you have wider commercial reasons to incorporate
Don't make the decision based on turnover alone.
The right structure depends on your profit, how much money you need personally and what you want your business to look like in the future.
I can help you compare the options using your actual numbers before you decide whether changing structure makes sense.
Last updated: September 2026
