Company Structure Comparison Calculator, 2026/27

How this is calculated

For the sole trader route, the full profit is taxed as personal income at the standard income tax bands, since a sole trader has no separate corporate tax layer; all profit belongs to the individual and is taxed accordingly.

For the limited company route, a salary is paid first, up to the amount you specify, which is generally set at or near the personal allowance to minimise tax and NIC while still protecting state pension entitlement. Corporation tax is then applied to the remaining profit at the 19% small profits rate, 25% main rate or marginal relief in between, and what is left is drawn as dividends.

Dividends are taxed using the £500 dividend allowance and current dividend rates, stacked on top of the salary for band purposes, so the comparison reflects a realistic two-stage extraction of company profit rather than a single flat rate.

Why the comparison is not always the same

The relative advantage of a limited company depends heavily on the profit level. At lower profits the gap is often small once you allow for the cost and complexity of running a company, while at higher profits the lower corporation tax rate compared with higher and additional rate income tax can produce a meaningful advantage, especially where profit is retained rather than fully drawn.

The comparison also ignores non-tax factors that often decide the question in practice: limited liability protection, the credibility of a limited company with clients or lenders, and the ability to leave profit in the company to smooth income between good and lean years.

Other factors worth weighing up

A sole trader has lower administrative overheads, no Companies House filings, and simpler year-end reporting via self assessment, which suits very small or short-term ventures.

A limited company can pay into a pension directly from company profit before corporation tax, gives more flexibility over when income is drawn personally, and separates personal and business liabilities, which matters more as risk or contract value grows.

Is a limited company always more tax efficient than a sole trader?

Not always. At lower profit levels the tax difference is often modest, and the extra administrative cost of running a company can outweigh it. The advantage tends to grow as profits rise into higher income tax bands.

What salary should a director pay themselves?

Many directors pay a salary around the personal allowance or the National Insurance secondary threshold, to secure a qualifying year for the state pension at low or no tax cost, then take further profit as dividends.

Does this comparison include Class 2 and Class 4 National Insurance?

No. This calculator focuses on income tax and corporation/dividend tax to keep the comparison clear; a self-employment or sole trader specific calculator would add Class 2 and Class 4 NIC for a fuller picture.

Can I switch from sole trader to limited company later?

Yes, this is a common path called incorporation. It has its own tax implications, including potential capital gains and disincorporation considerations if you ever reverse it, so it is worth planning rather than doing informally.