Free Holloway Davies research guide
Sole trader vs limited company guide
A plain-English comparison of the after-tax position for sole traders and limited companies at various profit levels in 2026/27, including when incorporation makes sense and when it does not.
Tax year: 2026/27. Last reviewed: Mon Apr 06 2026 00:00:00 GMT+0000 (Coordinated Universal Time).
Incorporation comparison (Excel)The honest answer
Incorporating is a calculation, not a default. A limited company can be more tax-efficient at some profit levels, but it also adds compliance costs (accountant fees, Companies House filing, payroll software, director duties) and removes the simplicity of sole-trader accounting. The model shows you the after-tax gap; the decision also depends on how much you retain vs withdraw, your growth plans, and whether you value simplicity.
Sole trader tax in 2026/27
A sole trader pays income tax and Class 4 National Insurance on net profit:
- Income tax: personal allowance £12,570 (nil), basic rate 20% on £12,571 to £50,270, higher rate 40% on £50,271 to £125,140, additional rate 45% above £125,140.
- Class 4 NIC: 6% on profit £12,570 to £50,270, 2% above £50,270. Class 2 NIC was abolished from 6 April 2024.
At £80,000 profit: income tax is £19,432 and Class 4 NIC is £2,857. Net cash after tax is approximately £57,711.
Limited company tax in 2026/27
Through a limited company at the same £80,000 profit, with salary set at £12,570 and no Employment Allowance:
- Employer NIC on salary: £1,136
- Taxable company profit: £66,294
- Corporation tax: approx. £13,818
- Dividends available: £52,476
- Dividend tax: approx. £9,157
- Net cash: approximately £55,890
At £80,000 profit the sole trader keeps approximately £1,822 more per year on these figures. This is not a universal result: at higher profits, or when the Employment Allowance applies, a company can pull ahead.
Where the crossover is
The company generally starts to win when:
- Profit is higher and more is retained in the company rather than extracted immediately.
- A genuine second employee enables the £10,500 Employment Allowance, removing the director's employer NIC.
- The director is already a higher-rate taxpayer from other income, making the lower corporation tax rate on retained profit more valuable.
The model lets you change the profit figure to see the crossover point for your situation.
What the model ignores (deliberately)
The comparison shows pure tax on extracted profit. It does not model:
- CGT or goodwill on transfer (can be material; s.162 incorporation relief may defer but not eliminate the charge).
- Stamp Duty if business assets include property.
- The cost of running a company (accountant, payroll, Companies House, bank).
- Pension contributions (which are deductible in both structures but often more efficient via a company).
A specialist models all of these before you commit either way.
Incorporation relief (s.162 TCGA 1992)
When a sole trader incorporates and transfers the whole business as a going concern in exchange entirely for shares, any capital gain on goodwill can be deferred into the base cost of those shares rather than taxed immediately. The relief does not apply if: the transfer is for cash as well as shares; the business is not transferred as a going concern; connected-party rules apply differently to goodwill created post-incorporation. A specialist checks whether the conditions are met before you proceed.
Questions to ask before you decide
- What is my current profit, and how much do I expect to extract each year vs retain?
- Do I have, or plan to hire, a genuine non-director employee?
- Do I have valuable goodwill? Has any of it been built since April 2002?
- Am I comfortable running payroll, filing a CT600 and meeting director duties?
- Does my bank, lease or client contract require or prohibit a company structure?
See what you could save by incorporating
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