“Should I be a sole trader or a limited company?”

It’s probably one of the most common questions we’re asked by business owners.

And, unfortunately, the answer isn’t quite as simple as:

“Limited companies pay less tax.” 😅

There was a time when incorporating a profitable business could produce a fairly obvious tax saving. But changes to Corporation Tax, dividend tax and National Insurance mean the difference is now much more dependent on how much your business earns, how much money you actually need personally and what you want to do with the profits.

So, in 2026, is it still worth operating through a limited company?

Let’s have a look. 👇

As a sole trader, you and the business are effectively the same person for tax purposes.

You receive the business income, deduct allowable expenses and pay Income Tax and National Insurance on the resulting taxable profit.

It’s generally the simplest way to operate a business.

There’s no separate company to maintain, no Corporation Tax Return and fewer Companies House requirements.

For many smaller businesses, that simplicity is a major advantage.

A limited company is a separate legal entity.

The company earns the income, pays its expenses and pays Corporation Tax on its profits.

You then decide how money is taken from the company personally, perhaps through:

💷 Salary
📈 Dividends
🏦 Pension contributions
🎁 Certain benefits
💰 Repayment of money you’ve previously lent the company

That additional flexibility is one of the biggest differences between the two structures.

But it also means more administration, more filing requirements and usually higher accountancy costs.

For most taxpayers in Wales, the standard Personal Allowance remains £12,570 for 2026/27.

After that, taxable income is generally subject to Income Tax at:

🔹 20% basic rate
🔹 40% higher rate
🔹 45% additional rate

A self-employed individual may also pay Class 4 National Insurance.

For 2026/27, this is generally:

🔹 6% on relevant profits between £12,570 and £50,270
🔹 2% on relevant profits above £50,270

So as your sole-trader profits increase, a significant portion of the additional profit can start disappearing in Income Tax and National Insurance.

And crucially, you’re generally taxed on the profit you’ve made, whether you actually withdraw all of that money from the business or leave some sitting in the business bank account.

A limited company pays Corporation Tax on its taxable profits.

The current rates are:

✅ 19% small profits rate where profits are £50,000 or less

✅ 25% main rate where profits exceed £250,000

For profits between those levels, Marginal Relief applies, meaning the effective Corporation Tax rate gradually increases between the two.

There are some complications here.

For example, the £50,000 and £250,000 limits can be reduced where the company has associated companies, so simply looking at one company’s profit doesn’t always tell you the rate that will apply.

And paying Corporation Tax isn’t necessarily the end of the story.

If you then want to take the remaining profits personally as dividends, there may be Dividend Tax to pay as well.

This is particularly important when comparing the two structures in 2026.

From 6 April 2026, the ordinary and upper rates of Dividend Tax increased.

The current rates above the £500 Dividend Allowance are:

🔹 10.75% for dividends falling within the basic-rate band

🔹 35.75% for dividends falling within the higher-rate band

🔹 39.35% for dividends falling within the additional-rate band

This means the old idea that you can simply put everything through a company and take it all as cheap dividends is increasingly outdated.

There can effectively be two layers of tax:

1️⃣ Corporation Tax when the company makes the profit

2️⃣ Dividend Tax when the shareholder takes those profits personally

Which is why the answer to “Which is cheaper?” depends heavily on what happens to the money after the business earns it.

This is where there isn’t a magic number.

You’ll sometimes see articles online saying things like:

“You should incorporate once your profit reaches £30,000.”

or:

“A limited company is better once you earn £50,000.”

We’d be very careful with rules like that.

Consider two business owners who both make £75,000 profit.

Business Owner A

Makes £75,000 and needs virtually all of it personally to pay the mortgage, household bills and general living costs.

Business Owner B

Also makes £75,000 but only needs £40,000 personally and is happy to leave the rest within the business or contribute some of it to a pension.

They have exactly the same business profit.

But the best structure for each person could be completely different.

That’s why profit alone shouldn’t determine whether you incorporate.

This can be one of the strongest arguments for a limited company.

Imagine your business makes £100,000 a year, but you only need £50,000 personally.

As a sole trader, you’re broadly taxed personally on the business profit regardless of whether you actually spend all of the cash.

A company gives you more control over when profits are extracted personally.

Some money might instead remain within the company to:

🏦 Build cash reserves
🚚 Purchase equipment
👥 Recruit employees
📈 Fund future growth
💼 Invest back into the business
🏢 Save towards larger business purchases

You don’t automatically avoid tax by leaving money in a company, but you may be able to defer the personal tax charge until the funds are actually extracted.

For growing businesses, that flexibility can be extremely useful.

This is another area where companies can become particularly attractive.

Instead of extracting all available profit as salary or dividends, a company may be able to make an employer pension contribution for a director.

Subject to the relevant rules and allowances, qualifying employer pension contributions can potentially reduce the company’s taxable profits without creating the same immediate Income Tax consequences as taking the money personally.

For a business owner who doesn’t need every penny of their company profits to live on, pension planning can therefore make a major difference to the overall tax position.

Of course, putting £20,000 into your pension isn’t much help if you need the £20,000 to pay the bills! 😂

Again, the right answer depends on the individual.

Directors will often take some income from their company as salary.

But salary planning has become more complicated following changes to employer National Insurance.

For 2026/27, employers generally pay 15% employer National Insurance on earnings above the relevant secondary threshold, which is currently only £5,000 per year for most employees.

The optimum salary therefore depends on things such as:

🔹 Whether the company has other employees
🔹 Whether Employment Allowance is available
🔹 Other income the director receives
🔹 The company’s Corporation Tax position
🔹 The director’s National Insurance record

This is another reason we’d avoid relying on an online article telling every director to pay themselves exactly the same salary.

Tax planning should be based on your company, not somebody else’s spreadsheet.

This is probably the most important point in the whole article.

Choosing between a sole trader and a limited company isn’t simply a tax calculation.

A limited company can also provide:

🛡️ Limited liability

The company is legally separate from its shareholders.

While there are exceptions and directors still have responsibilities, this can provide greater protection than operating personally as a sole trader.

🤝 Commercial credibility

Some customers, lenders and larger organisations prefer dealing with limited companies.

In some industries, being incorporated can make a business appear more established.

👥 Ownership flexibility

Company shares can make it easier to introduce additional owners, involve family members where commercially appropriate or restructure the ownership of the business.

📈 Future sale

If you’re building a business that you eventually want to sell, operating through a company can offer significantly more options when planning an eventual exit.

🏦 Separating personal and business finances

Having the business operate as its own legal entity can encourage clearer financial separation and better business discipline.

😅 And what are the disadvantages?

Limited companies aren’t automatically better.

You’ll generally have additional responsibilities including:

📚 Annual accounts
🧾 Corporation Tax Returns
🏛️ Companies House filings
💼 Payroll where salary is paid
📈 Dividend paperwork
🏦 Separate company records
📋 Director responsibilities

Your company’s accounts may also be publicly available through Companies House.

A sole trader generally has considerably less administration.

If someone makes modest profits, takes all the money personally and has no particular commercial reason to incorporate, creating a company just to save a small amount of tax might simply create unnecessary paperwork and cost.

This is usually how we’d start looking at it:

Around £30,000 profit

For many businesses, the simplicity of remaining a sole trader can still be very attractive. A company isn’t automatically going to produce a meaningful saving once additional administration is considered.

Around £50,000 profit

This is where the conversation becomes much more interesting, particularly if the owner doesn’t need to withdraw all of the profit personally.

Around £75,000 profit

The amount being withdrawn, pension planning and whether profits can remain within the company become increasingly important.

Around £100,000 profit

Planning becomes particularly valuable. Personal Allowance restrictions can also start to become relevant where an individual’s adjusted net income exceeds £100,000.

£150,000+ profit

At this level, we’d usually want to look beyond simply asking “sole trader or limited company?” and consider the wider structure, remuneration, pensions, investments, future ownership and eventual exit strategy.

These aren’t automatic incorporation thresholds.

They’re simply examples of why the conversation becomes more important as profits increase.

Potentially, but this needs to be done properly.

A company can have multiple shareholders, and in genuine circumstances involving spouses or civil partners this can sometimes form part of wider family tax planning.

However, you shouldn’t simply give somebody shares because you’ve read online that it will reduce your tax bill.

Ownership needs to reflect the actual legal and commercial arrangements, and anti-avoidance rules can apply.

This is an area where we’d strongly recommend taking advice before changing the shareholding, rather than trying to fix it afterwards.

Your structure can also change how certain costs and benefits are taxed.

Vehicles are a good example.

Whether you buy a vehicle personally or through a company can produce dramatically different results depending on whether it’s:

🚗 A normal petrol or diesel car
⚡ An electric vehicle
🚐 A van
🛻 Another commercial vehicle

The same applies to things like private medical insurance, phones, travel and other benefits.

So sometimes the best structure isn’t determined by the headline tax rates at all.

It’s determined by what the business actually needs to spend money on.

The frustrating accountant’s answer is:

It depends! 😅

But that’s genuinely the point.

A limited company might make sense where:

✅ Profits are increasing

✅ You don’t need to withdraw everything personally

✅ You want to make pension contributions

✅ You’re building a business to grow or sell

✅ You want limited liability

✅ You need greater flexibility over how and when profits are extracted

Remaining a sole trader may make more sense where:

✅ Profits are relatively modest

✅ You withdraw almost everything the business earns

✅ Simplicity is important

✅ The potential tax saving doesn’t justify the additional administration

✅ You don’t currently need a corporate structure commercially

There is no universal profit figure where everybody should suddenly incorporate.

Don’t make the decision based solely on a tax calculator.

At Llewellyns Chartered Certified Accountants, we can compare the tax position under both structures using your actual business profits, personal income requirements and future plans.

That means looking beyond this year’s tax bill and considering where you want the business to be in three, five or even ten years’ time.

If you’re currently operating as a sole trader and wondering whether it’s time to incorporate, get in touch and we’ll help you work through the numbers.

📍 Cardiff: 02920 624230
📍 Tonypandy: 01443 303230
📧 info@llewellyns.co.uk