If you extract all of a limited company's profit as salary and dividends in the same year, the tax advantage over a sole trader is smaller than most people assume — and at many profit levels, a sole trader now keeps slightly more, once employer National Insurance (15% since April 2025) is properly accounted for. The real tax advantage of a limited company comes from retaining profit inside the company or extracting it via employer pension contributions instead of dividends, not from simply drawing everything out. A sole trader is taxed on 100% of profit the moment it's earned; a company only taxes you personally on what you actually withdraw. There is no single right answer — it depends on your profit level, how much you need to draw out to live on, and your appetite for the extra admin a company brings.
This is the question almost every new business owner asks, and the honest answer is that it depends entirely on how much profit you're making. Below is the actual arithmetic, not a rule of thumb, comparing the same £80,000 of profit run through both structures for the 2026/27 tax year.
01 The two structures, in plain terms
As a sole trader, you and the business are legally the same entity. Profit is your income, taxed through Self Assessment under Income Tax and Class 4 National Insurance, with no separation between your money and the business's money. As a limited company, the company is a distinct legal person, taxed separately under Corporation Tax. You extract value from it as salary, dividends, or a combination, each taxed under its own rules, and profit left inside the company isn't yours personally until you draw it out.
02 Worked example: £80,000 profit as a sole trader
Callum's entire £80,000 is taxed as his personal income the moment it's earned, whether he spends it, saves it, or leaves it in the business bank account. There's no separate step, no company return, and no decision about how to extract it — it's already his.
03 Worked example: £80,000 profit through a limited company
Once employer National Insurance is properly included — 15% on the salary above £5,000, a real cost most simplified comparisons leave out — Callum actually keeps about £1,946 more than Priya at this profit level, despite Priya's salary and dividends being taxed at lower headline rates than Callum's Income Tax. Full extraction in the same year, once you add up every actual charge involved, doesn't automatically favour the limited company the way it once did before the April 2025 employer NIC increase.
04 Where the crossover point actually sits
Older articles on this topic — and a fair amount of generic advice still online — describe a clean crossover somewhere around £30,000–£50,000 profit, above which a limited company simply wins. That was a reasonably accurate picture before April 2025, when employer National Insurance rose from 13.8% to 15% and the threshold at which it starts fell from £9,100 to £5,000. Both changes specifically increase the cost of paying yourself a salary through a company, which is exactly the mechanism the old crossover figures relied on.
| Extraction approach | Where the limited company genuinely wins |
|---|---|
| Full extraction, same year (salary + dividends) | Only at very high profit levels, and by a smaller margin than commonly assumed |
| Partial extraction, profit retained in the company | Meaningfully, since retained profit is taxed once at Corporation Tax rates, not twice |
| Employer pension contributions instead of dividends | Significantly — no employer NIC, no dividend tax, full Corporation Tax deduction |
The honest picture for 2026/27: if you plan to draw out every pound of profit as salary and dividends in the same year you earn it, run your actual numbers before assuming incorporation saves money — at many profit levels it now doesn't, by much or at all. The genuine, durable advantage of a limited company shows up when profit is retained for growth, or extracted through employer pension contributions rather than dividends, both of which a sole trader structure simply cannot do.
05 What a limited company costs you beyond tax
- Accountancy fees are typically higher — statutory accounts, a CT600 return, and Companies House filings add complexity a sole trader's Self Assessment doesn't have
- Your finances become public — company accounts and director details are visible on Companies House, whereas a sole trader's finances stay private
- Money in the company isn't automatically yours — you have to formally extract it as salary or dividends, with tax due at that point, unlike a sole trader who owns profit outright the moment it's earned
- Directors have legal duties under the Companies Act 2006 that sole traders simply don't carry — filing deadlines, record-keeping obligations, and personal liability for certain failures
06 Non-tax reasons to choose either structure
Tax is rarely the only factor. A limited company offers limited liability, genuinely separating your personal assets from business debts in most circumstances — valuable if your work carries real financial or legal risk. It can also look more credible to certain clients and is generally required before taking on outside investment. A sole trader structure suits someone testing a new venture, wanting maximum simplicity, or whose profit is modest enough that the extra admin of a company isn't worth the tax saving.
07 Frequently asked questions
Yes, and it's common to start as a sole trader and incorporate once profit grows enough to justify it. The process involves registering a new company, transferring the business (with some tax and legal considerations around asset transfer), and closing your sole trader registration once the switch is complete.
Generally yes for ordinary business debts, but it isn't absolute. Directors can still be personally liable in cases of wrongful trading, fraud, or where they've given a personal guarantee for a loan or lease, which lenders and landlords frequently require from small company directors regardless of limited liability status.
No, and this is actually one of a limited company's advantages. Profit can stay in the company, taxed only at Corporation Tax rates, until you choose to draw it as salary or dividends, giving you control over when personal tax is triggered — a flexibility a sole trader doesn't have.
Not automatically, and less so since employer National Insurance rose in April 2025. If you extract all profit as salary and dividends in the same year, the advantage is often smaller than assumed, or absent. The company's real advantage comes from retaining profit or using employer pension contributions, not simply from a lower headline tax rate.
If you provide services through a limited company to a single client in a way that resembles employment, IR35 may apply regardless of the tax efficiency of the structure itself. This is assessed separately from the sole trader vs limited company decision — see our dedicated guide on IR35 for how status is determined.
Not sure which structure suits your numbers?
DKAT Accountants models both scenarios against your actual profit and plans, and handles the incorporation process if a limited company comes out ahead.
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