For most of the last decade, the rule of thumb for UK self-employment was simple. Clear £40,000 of profit, switch to a Limited company, save thousands. The arithmetic that powered that rule has now been broken twice in 18 months.
The Autumn 2024 Budget raised employer National Insurance to 15% and dropped its secondary threshold from £9,100 to £5,000. That hit one-person Ltds where they live: the small director's salary. The Autumn 2025 Budget then raised basic and higher dividend tax rates by 2 percentage points each — to 10.75% and 35.75% respectively — effective 6 April 2026. Sitting on top of the 25% Corporation Tax main rate already in force since 2023, the cumulative effect is decisive.
I built the calculator on our other guide after my wife was told for the third year running that she should incorporate. Once I ran the numbers properly with verified 2026/27 rates, the calculator kept disagreeing with the conventional advice. Going Ltd in the most common one-person, all-profit-extracted scenario costs more tax now, not less — at every profit level we tested between £30,000 and £200,000. This post is the long-form explanation: the comparison table, the worked example, and the five specific cases where Ltd still wins.
The headline answer
Here's the comparison at seven profit levels, computed using verified HMRC and Scottish Government 2026/27 rates. The Limited company column assumes the standard one-person setup: £12,570 director's salary, all remaining profit extracted as dividends after Corporation Tax, plus the typical extra £1,200 a year in accountancy. The sole trader column is Income Tax + Class 4 National Insurance on the same profit. Both columns use rUK rates (England, Wales, Northern Ireland — Scottish bands don't change the qualitative pattern).
| Profit | Sole trader (IT + Class 4) | Ltd (CT + ENI + dividend tax + acc.) | Ltd worse by |
|---|---|---|---|
| £30,000 | £4,531.80 | £6,796.56 | +£2,264.76 |
| £40,000 | £7,131.80 | £9,567.30 | +£2,435.50 |
| £55,000 | £11,788.60 | £13,723.43 | +£1,934.83 |
| £75,000 | £20,188.60 | £22,796.31 | +£2,607.71 |
| £100,000 | £30,688.60 | £35,990.37 | +£5,301.77 |
| £150,000 | £58,588.10 | £66,090.21 | +£7,502.11 |
| £200,000 | £82,088.10 | £95,887.48 | +£13,799.38 |
Every row is positive. Ltd loses at every profit level. The differential dips slightly at £55,000 because the dividend layer fits neatly inside the basic-rate band there; once you push into higher-rate dividend territory, the gap widens fast.
What this is not: a claim that nobody should ever incorporate. There are five concrete situations where the Ltd structure still wins on tax — they're laid out below. The point is that the standard rule of thumb (one-person business, profit above £40k, extracts everything, time to incorporate) is now the wrong default.
What changed: two Budgets in 18 months
Three structural changes compounded between Spring 2023 and April 2026. None of them was individually fatal to the Ltd-at-£40k rule. Together, they were.
Spring 2023: Corporation Tax main rate to 25%
For nearly a decade, Corporation Tax was a flat 19%. The Spring Budget 2023 reintroduced a banded structure: 19% on profits up to £50,000, 25% on profits above £250,000, with marginal relief between those points giving an effective 26.5% on every pound of profit between £50,000 and £250,000. A solo Ltd profitable enough to retain a few years of buffer landed firmly inside the marginal band, at a Corporation Tax rate higher than the basic Income Tax rate a sole trader would pay on the same profit.
Autumn 2024 Budget: employer NI to 15%, secondary threshold to £5,000
Employer NI was 13.8% with a £9,100 secondary threshold. From 6 April 2025 it became 15% with a £5,000 secondary threshold. For a one-person Ltd paying its director the standard £12,570 PA-covered salary, the change took employer NI from £478 a year to £1,135.50 — a 137% increase, all on a wage paid by the company to itself. There's no equivalent cost for a sole trader. Class 4 NI on the same profit is paid by the individual, not by an employer.
Autumn 2025 Budget: dividend basic and higher rates each up 2 percentage points
Dividend tax rates had sat at 8.75% / 33.75% / 39.35% (basic / higher / additional) since April 2022. The Autumn 2025 Budget raised the basic and higher rates to 10.75% and 35.75% from 6 April 2026. The additional rate stayed at 39.35%. For a Ltd whose owner draws around £30,000 of dividends a year, that's roughly £600 extra Income Tax on the same gross dividend pot — paid on top of the Corporation Tax already deducted by the company before the dividend was even declared.
The effect is cumulative. At £40,000 of profit, sole-trader tax is £7,131.80. The Ltd version with the same profit pays £4,995.96 in Corporation Tax, £1,135.50 in employer NI, £2,235.84 in dividend tax (on the post-CT distributable profit), and £1,200 in additional accountancy — £9,567.30 total. The Ltd structure spends the equivalent of roughly five weeks' worth of profit on just being a Limited company.
How sole trader tax stacks
Two layers, both straightforward.
- Income Tax on profit above the £12,570 Personal Allowance. Basic rate 20% to £50,270, higher rate 40% to £125,140, additional rate 45% above that.
- Class 4 National Insurance on profit above £12,570. 6% on profits up to £50,270, 2% above.
Both come out of one Self Assessment return. There's no separate filing, no payroll, no Companies House confirmation statement, no minimum two directors, no formal dividend declaration. We have a live calculator that runs the full sole-trader sum from a single profit figure, including the Scottish band variant.
How Ltd tax stacks for the all-extraction case
This is the part that keeps surprising people. A solo Ltd extracting all profit isn't paying one tax. It's paying six.
Six layers, each individually small, that together exceed the two-layer sole-trader cost at every profit level we ran. A reader running the math from scratch will arrive at our table — that's the point of it.
Worked example: Sarah at £55,000 profit (rUK)
Back to Sarah, the Bishopston-based freelance designer from our calculator post. Her business has been growing. Last year she billed £62,500 with about £7,500 of allowable expenses, putting profit at £55,000. Her accountant has suggested going Ltd. Should she?
Sole trader at £55,000 profit
| Personal Allowance | £12,570 |
| Taxable profit | £42,430 |
| · Basic rate (20% on £37,700) | £7,540.00 |
| · Higher rate (40% on £4,730) | £1,892.00 |
| Income Tax | £9,432.00 |
| Class 4 NI | £2,356.60 |
| Total tax + NI | £11,788.60 |
| Take-home | £43,211.40 |
| Effective rate | 21.4% |
Limited company at £55,000 profit
| Director's salary | £12,570 |
| Employer NI (15% × £7,570) | £1,135.50 |
| CT-able profit | £41,294.50 |
| Corporation Tax (19%) | £7,845.96 |
| Dividends available | £33,448.54 |
| · Allowance (£500 at 0%) | £0.00 |
| · Basic rate (10.75% on £32,948.54) | £3,541.97 |
| Dividend tax | £3,541.97 |
| Additional accountancy | £1,200.00 |
| Total Ltd cost | £13,723.43 |
| Take-home | £41,276.57 |
| Effective rate | 25.0% |
Sarah is £1,934.83 a year worse off going Ltd. Her effective tax rate jumps from 21.4% to 25.0%. Take-home drops by nearly £2,000. None of this assumes she's doing anything unusual — the Ltd setup is the textbook one-person, salary-plus-dividends extraction every UK accountancy blog used to recommend.
The accountant's instinct ("you're earning enough, time to incorporate") was reasonable in 2018. It hasn't been correct in years.
When Ltd actually wins
Five concrete cases flip the math back. None applies to the standard "extract everything, single owner" scenario. Each one represents a real choice with real friction — but for the right person, any of them can swing tens of thousands across a working life.
1. Retained earnings inside the company
If you don't need to draw all your profit each year — perhaps because your spouse already covers household costs, or you have other income — leaving cash inside the company defers the dividend tax. The retained profit pays Corporation Tax once. Dividend tax is only triggered when (and if) you eventually withdraw it. Spread across a decade, the deferral can outweigh the 2pp dividend rate uplift several times over.
Where the line is: if you'd retain about £20,000 a year or more, the math starts to favour Ltd at around £60,000+ of profit. Below that, the deferral isn't large enough to cover the structural overhead.
2. Dividend split with a spouse
A spouse appointed as a second director and shareholder takes their own £12,570 Personal Allowance and their own £37,700 basic-rate dividend band. Doubling the basic-rate dividend bandwidth roughly halves the higher-rate dividend exposure. For a couple where one partner runs the business and the other has little or no other income, this is the single biggest reason a Ltd can flip back to being more tax-efficient.
Constraint: the settlements legislation (the Arctic Systems framework) means the spouse's shares must carry full economic rights, not be designed solely for dividend access. For genuine spouses who participate or share business risk, HMRC accepts the structure.
3. Pension contributions through the company
Employer pension contributions are deductible against Corporation Tax and don't trigger personal Income Tax on the way in. A £20,000 employer contribution costs the company about £14,800 net of CT relief and reaches the pension wrapper intact — versus a personal contribution that would have to come out of post-tax dividend income.
Cap: the £60,000 annual allowance applies, tapered for high earners (£3,600 minimum for incomes above £360,000). Carry-forward of unused allowance from the previous three tax years is available.
4. Future Business Asset Disposal Relief sale
BADR (formerly Entrepreneurs' Relief) gives a 14% Capital Gains Tax rate on the sale of a qualifying business — rising to 18% from 6 April 2026 per the Autumn 2024 Budget changes. Cap of £1 million in lifetime gains. For a Ltd owner who plans to build the company and eventually sell or wind it up rather than draw out year-by-year dividends, BADR transforms the effective tax rate on accumulated retained earnings.
Qualification: at least 5% of ordinary shares and voting rights, held for at least two years before sale.
5. Contract or credibility requirements
Some end clients — particularly in enterprise procurement, government contracting, and certain regulated sectors — won't engage a non-Limited supplier. This is rarely written down explicitly; it shows up at the procurement stage as "supplier must be a registered company". For sole traders who would be paying the Ltd premium for non-tax reasons anyway, the structural cost is sunk and the question becomes how to extract efficiently within Ltd, not whether to be Ltd.
If any one of these applies to your situation, the comparison table at the top of this post understates the case for incorporating. If none applies, it's accurate.
Non-tax reasons people incorporate anyway
Tax is one input. There are others.
- Limited liability. A sole trader is personally liable for business debts. A Limited company creates legal separation between owner and business. For trades with claim risk (construction, electrical, food handling, or anything carrying inventory or contractual exposure), the protection is meaningful — even if professional indemnity insurance covers most realistic scenarios for low-risk consultancies.
- Brand perception. "Ltd" after a name reads as more substantial to some clients. Whether that's true is a separate question; whether clients act on the perception is well-documented.
- Easier to bring on co-founders. Splitting equity is straightforward in a company. Splitting a sole-trader business effectively means dissolving one and starting a partnership.
- Investor signal. If you might raise external capital, you'll need to be Ltd anyway. Investors don't take equity in sole traders.
- Pension flexibility. Employer contributions through a Ltd are far more efficient than personal contributions. Already covered as scenario 3 above, but worth flagging here too as a non-tax driver of choice.
Switching back isn't free
If you incorporated when the rule of thumb was true and the math now disagrees, the sensible response is to compare the cost of staying Ltd against the cost of unwinding. Closing a Ltd company has overhead.
Two routes. Strike-off is fastest and cheapest — £10 to Companies House, suitable when the company has no significant retained earnings and no outstanding liabilities. Final accounts and Corporation Tax return still apply. Members' Voluntary Liquidation applies when the company holds substantial retained earnings: the liquidator distributes the residual cash to shareholders, and the distribution can qualify for Business Asset Disposal Relief at 14% rather than dividend tax at up to 39.35%. MVL costs £1,500–£3,000 in liquidator fees, plus the final accounts work.
The decision usually hinges on retained-earnings size. Above roughly £25,000 retained, MVL with BADR usually beats strike-off plus dividend extraction. Below that, strike-off wins on simplicity. An accountant who has done a few of each can usually settle the question in an hour.
A decision framework
Strip the complexity out and the choice usually comes down to a short list per side.
Sole trader is right when
- You're a one-person business and likely to stay that way
- You extract all profit each year (no retained earnings strategy)
- Your trade carries low claim risk and is well covered by PI insurance
- You have no spouse who could take genuine dividend share
- You don't expect to raise external investment
- You value low admin overhead
Limited is right when
- You can leave £20k+ a year retained inside the company
- You have a spouse who can genuinely participate as a shareholder
- You want significant pension contributions routed through the business
- You're heading toward a future BADR-eligible sale
- Your trade carries real claim risk that PI alone won't cover
- Specific clients or contracts require Ltd status
If you check three or more on the sole-trader side, the comparison table at the top of this post is the math that applies to you. If you check three or more on the Ltd side, run the numbers with your specific retained-earnings target and spouse situation — the standard "extract everything" version of the math doesn't capture what you'd actually do.
Frequently asked questions
Is it always cheaper to be a sole trader in 2026/27?
For the simple all-extraction case — one person, all profit drawn out as a small director's salary plus dividends — yes, at every profit level we tested from £30,000 to £200,000. The Autumn 2024 Budget (employer NI to 15%, secondary threshold to £5,000) and Autumn 2025 Budget (dividend basic to 10.75%, higher to 35.75%) compounded the 25% Corporation Tax main rate already introduced in 2023. Together they make stacked Ltd taxation more expensive than the IT + Class 4 NI combination a sole trader pays. Ltd still wins in specific structural cases — see the 'When Ltd actually wins' section above.
When does going Limited actually save tax?
Five cases consistently flip the maths back in Ltd's favour. Retaining profit inside the company instead of extracting it (deferring the dividend tax). Splitting income with a spouse who's also a director and shareholder (uses two Personal Allowances and two basic-rate bands). Routing pension contributions through the company as employer contributions (deductible against Corporation Tax, no personal Income Tax). Earmarking the company for a future sale that qualifies for Business Asset Disposal Relief at 14% (rising to 18% from April 2026). And combinations of the above. None apply to the standard 'extract all profit, single owner' case.
Can I switch back from Limited to sole trader?
Yes, but it's not free. You'll need final company accounts and a final Corporation Tax return, plus either a strike-off application (£10 to Companies House, fastest if no liabilities outstanding) or a Members' Voluntary Liquidation if the company has substantial retained earnings (£1,500–£3,000 in liquidator fees, but BADR may apply to the distribution at 14% rather than dividend tax at up to 39.35%). Plan the timing across tax years to spread any final dividend extraction across two basic-rate bands.
Does limited liability really matter for me?
It depends on your trade. A sole trader is personally liable for business debts — if the business defaults, creditors can come for personal assets including your home. A Limited company creates a legal separation: shareholders' liability is limited to the value of their shares. For a freelance designer or low-claim-risk consultant, the practical difference is often academic — most contractual disputes are settled through indemnity clauses and professional indemnity insurance regardless of structure. For a trade with physical risk (construction, electrical work, food handling) or any business carrying inventory, debts, or a possibility of large claims against it, the protection is meaningful.
How much does running a Limited company actually cost?
The marginal cost over a sole trader is roughly £1,000–£1,500 a year. Annual confirmation statement to Companies House (£34). Annual accounts plus Corporation Tax return — a one-person micro-entity typically costs £700–£1,200 with an accountant who specialises in small Ltds (sole-trader-only accountancy is often £300–£500). Payroll and pension setup if you take a salary (£100–£300 a year). Plus the time cost of dividend vouchers, board minutes, and slightly more rigorous separation of personal and company funds. None of it is hard. All of it is administrative friction the sole-trader structure doesn't have.
What about IR35 — does it affect this comparison?
IR35 (the off-payroll working rules) applies when a contractor working through a Personal Service Company is — in HMRC's view — effectively an employee of the end client. If IR35 applies, the client pays the contractor as if employed: PAYE Income Tax and Class 1 employee NI come off at source, leaving very little for the Ltd to extract as dividend. In that scenario, the Ltd structure offers almost no tax advantage and adds compliance overhead. For solo Ltds in genuinely self-employed engagements (multiple clients, your own equipment, control over how the work is done) IR35 doesn't apply. If you're contracting full-time for a single end client, get an IR35 status determination before incorporating.
Can my spouse be a director and split dividends?
Yes. Appointing a spouse as a shareholder and second director lets the company pay dividends to both of you, using two Personal Allowances and two basic-rate dividend bands instead of one. The settlements legislation (the Arctic Systems case framework) means the spouse's shares must carry full economic rights — they can't be designed solely for dividend access — but for genuine spouses who participate in the business or share its risks, this is a well-trodden HMRC-accepted setup. Done properly, it's the single biggest reason a one-person Ltd flips back to being more tax-efficient than sole trader.
What's BADR and why does it matter?
Business Asset Disposal Relief (formerly Entrepreneurs' Relief) gives a reduced Capital Gains Tax rate on the sale of a qualifying business — 14% for 2025/26 and 2026/27 (rising to 18% from 6 April 2026 per the Autumn 2024 Budget changes), capped at a £1 million lifetime allowance. For a Ltd company owner extracting profit through a sale rather than year-by-year dividends, BADR can transform the effective tax rate on accumulated retained earnings. It only applies to qualifying disposals — owners must hold at least 5% of ordinary shares and voting rights for at least two years before sale. Sole traders also qualify when selling business assets, but the structural fit is usually stronger inside a Limited company.
Sources & further reading
All rates, thresholds, and structural rules cited on this page come from official UK Government and HMRC publications. Tax facts (rates, bands, deadlines) are public domain; any directly-quoted HMRC text would be reused under the Open Government Licence v3.0 with attribution.
- gov.uk/corporation-tax-rates — Corporation Tax small profits / main rate / marginal relief
- gov.uk/tax-on-dividends — dividend allowance and rates for 6 April 2026 onward
- gov.uk/national-insurance-rates-letters — employer NI rate and secondary threshold
- gov.uk/business-asset-disposal-relief — BADR qualifying conditions and rates
- gov.uk/limited-company-formation — Companies House registration
- gov.uk/strike-off-your-company-from-companies-register — DS01 strike-off process
- gov.uk/government/publications/dealing-with-hmrc-as-a-limited-company-going-into-liquidation — MVL guidance
- gov.uk/topic/business-tax/ir35 — off-payroll working rules