Sole Trader vs Ltd Comparison Table

This comparison generates a side-by-side table at multiple profit levels from £20,000 to £100,000, showing the total tax burden and take-home pay under each business structure. For the sole trader column, each profit level is run through the full Income Tax bands (20%/40%/45% after the £12,570 Personal Allowance), and Class 4 NI (6% on £12,570–£50,270, 2% above). The result is the net income the sole trader retains.

For the limited company column, the calculation assumes an optimal extraction strategy: salary set at the Personal Allowance level of £12,570 (minimising NI), with remaining profits subject to Corporation Tax and then withdrawn as dividends. Corporation Tax rates are applied using the marginal relief formula for profits between £50,000 and £250,000 (effective rate rising from 19% to 25%). Dividend tax is calculated at 8.75%/33.75%/39.35% after the £500 dividend allowance.

The comparison accounts for the additional running costs of a limited company—typically £1,000–£2,000 per year for accountancy, Companies House filing fees (£13), and Confirmation Statement fees (£34). These are deducted from the Ltd take-home to give a fair like-for-like comparison. The table clearly shows the crossover point where Ltd becomes more tax-efficient and quantifies the annual saving or cost at each profit level, helping business owners make an informed structural decision.

Side-by-side comparison 2026/27. Sample £50,000 profit: Sole trader pays Income Tax £7,486 + Class 4 NI £2,262 = £9,748 (19.5% effective). Ltd company pays CT 19% on £50k Small Profits Rate = £9,500; director takes £12,570 salary + £35,930 dividends → dividend tax £3,099 = £12,599 total but takes home £37,401 vs sole trader £40,252. Sole trader wins at £50k. £75k profit: sole trader £18,592; Ltd company £14,475 + £4,143 = £18,618 — virtually identical. £100k: sole trader £30,232; Ltd company £19,000 + £5,143 = £24,143 — Ltd saves £6,089.

When sole trader is better. Profits under £40,000: simpler admin saves £1,200-£2,400/year accounting. Lower fixed costs (no Companies House annual confirmation £13, no audit, no statutory accounts). One Self Assessment annually vs CT600 + Director SA + Confirmation Statement. Best for: solo professionals (consultants, freelancers); side hustles; businesses starting up (test market); seasonal businesses; <£40k profit consistently. No legal liability protection — personal assets at risk.

When limited company is better. Profits £45,000+: tax savings exceed admin costs. Even better above £100,000 (avoid 60% effective rate from Personal Allowance taper via pension contributions through Ltd company). Benefits: limited liability protection; professional image; tax-efficient pension contributions (no NI); salary sacrifice options; capital extraction flexibility (timing of dividends); shareholding flexibility (split ownership with spouse — saves more tax). Costs: £200-£500 incorporation; £1,200-£1,800/year accounts.

IR35 — the contractor consideration. Limited company contractors face IR35 (off-payroll working rules). Inside IR35: must pay tax as if employee — Ltd tax advantage eliminated. Outside IR35: full Ltd tax efficiency. Since April 2021: medium/large clients determine IR35 status. Small clients (<£10.2M turnover): contractor decides. CEST tool (gov.uk) gives initial view but not binding. Sole traders: NOT subject to IR35 — different status determination rules apply. Many contractors use sole trader OR umbrella company to avoid IR35 complexity.

Switching from sole trader to Ltd company. Best time: when profit consistently above £40-£45k. Process: register Ltd company at Companies House (£12-£100); transfer existing business assets (goodwill, equipment) to company; close sole trader business; first Ltd year-end accounts due 21 months after incorporation (then yearly). Tax considerations: Incorporation Relief (CGT deferral on transfer of business assets); business asset transfer can trigger SDLT on property. Use accountant (£500-£2,000) for first year transition — avoids costly mistakes.