How this is calculated
As a sole trader, all business profit is taxed as your own income in the year it arises, using the standard personal allowance and income tax bands, plus Class 4 National Insurance at 6% on profits between the lower and upper profits limits and 2% above that.
As a limited company, the business profit belongs to the company. A salary is deducted (attracting employer National Insurance above the secondary threshold) before corporation tax is charged at 19% to 25% with marginal relief, and the remaining profit can be paid out as dividends, taxed personally on top of the salary using the 2026/27 dividend allowance and rates.
The comparison nets off all company and personal tax to reach a single take-home figure for each structure, so the 'better' answer already accounts for the fact that a limited company pays two layers of tax (corporation tax then dividend tax) while a sole trader pays only one.
Why the answer changes with profit level
At lower profit levels, the compliance cost and complexity of a limited company (accounts, corporation tax returns, payroll) often outweighs a modest tax saving, and many sole traders below roughly £30,000-£40,000 profit find incorporation is not worth it purely on tax grounds.
As profit rises past the higher rate threshold, the gap tends to widen in favour of the limited company, mainly because dividends do not attract National Insurance and profits can be retained in the company rather than drawn out and taxed immediately, something a sole trader cannot do since all profit is taxed as it arises regardless of drawings.
Non-tax factors
A limited company gives limited liability protection, a separate legal identity that can help when contracting with larger clients, and more flexibility over when profit is drawn personally. It also brings statutory filing obligations at Companies House and generally higher accountancy fees.
A sole trader has simpler ongoing administration and can access certain reliefs, such as the trading allowance and simplified expenses, that do not apply in the same way to a company, but has unlimited personal liability for business debts.
What this means for your company
Treat the result as a planning figure for the 2026/27 tax year. If it changes what you were about to do, take a director's salary, a dividend, a large asset purchase or a filing decision, check it against your own accounts first. We can review the position with you and confirm the tax treatment before you commit.
Frequently asked questions
At what profit level does a limited company become worthwhile?
There is no single figure, but many advisers see the tax case for incorporation strengthen once profit consistently exceeds roughly £30,000 to £40,000 a year, once company running costs and administrative time are weighed against the tax saved.
Do sole traders still pay Class 2 National Insurance?
Most self-employed people with profits above the small profits threshold no longer pay Class 2 NIC as a separate charge, though they can choose to pay it voluntarily to protect their state pension record if profits are below that threshold.
Can I take all company profit out immediately as a director?
You can, but doing so removes the deferral advantage of a company. Leaving profit inside the company until you need it is one of the main tax benefits over sole trader status, where all profit is taxed as it arises.
Does limited liability affect the tax comparison?
No, limited liability is a legal protection, not a tax effect, so it does not appear in this calculation, but it is often just as important as the tax outcome when choosing a trading structure.