Sole Trader vs Limited Company
The real differences between trading as a sole trader and as a limited company — tax, liability, admin and credibility — with a live calculator that compares your take-home both ways.
The fundamental difference
As a sole trader, you and the business are the same legal person — simple to run, but you are personally liable for its debts. A limited company is a separate legal entity that you own and direct.
Limited liability is often the deciding factor, not just the tax.
How each is taxed
The two structures are taxed in completely different ways:
- Sole trader — Income Tax and Class 4 NIC on all profits, whether you draw them or not
- Limited company — Corporation Tax on profit, then you take a salary and dividends
- A company lets you control when and how you extract profit
The company advantage grows with profit — and shrinks if you draw every penny.
Admin, cost and privacy
Running a company is more work and less private:
- Sole traders file one Self Assessment; companies file accounts and a CT600
- Company details and accounts are public at Companies House
- Companies cost more to run, but can look more established
When a sole trader wins
Simpler is sometimes genuinely better:
- Lower profits, where the extra admin is not worth it
- You value privacy and simplicity
- You are still testing the idea
What would you actually take home?
Profit available before the director's salary and Corporation Tax — drag to your figure.
- Director salary (PA)£12,570
- Employer's NIC−£1,136
- Corporation Tax−£19,118
- Dividends drawn£67,176
- Dividend tax−£13,078
Effective tax rate 33% after Corporation Tax, on the optimal low-salary-plus-dividend mix. A pension contribution typically lowers this further.
Sole trader keeps the most at £100,000 profit
At this level a sole trader keeps roughly £2,643 more — the limited-company advantage widens as profits rise and when you don't draw everything.
- Salary to the £12,570 personal allowance, the rest as dividends — no NIC on dividends.
- An employer pension contribution would push the 33% effective rate lower still.
- Dividends need retained profit and proper paperwork to be lawful.
- Gross profit£100,000
- Income tax−£27,432
- Class 4 NIC−£3,257
- Net to you£69,311
- Director salary (PA)£12,570
- Employer's NIC−£1,136
- Corporation Tax−£19,118
- Dividends drawn£67,176
- Dividend tax−£13,078
- Net to you£66,668
- Assignment rate£100,000
- Employer's NIC + margin−£14,530
- Income tax−£21,620
- Class 1 NIC−£3,720
- Net to you£60,130
Illustrative estimate for a standalone company, England/Wales/NI, drawing all profit, with no other income or pension. Your position may differ.
When a company wins
A company earns its keep when:
- Profits are higher and you do not need to draw them all
- You want limited liability protecting your personal assets
- You are raising investment or building to sell
- Clients or contracts require you to be a company
Switching over later
You can incorporate when the time is right — moving your sole trade into a company — with reliefs that can defer the tax on goodwill and assets. It is a planned step, not a scramble.
Common questions
Is a limited company more tax-efficient than a sole trader?
Often at higher profits, especially if you do not need to draw all the profit — but after the 2023 Corporation Tax rise and higher dividend tax, the gap is smaller than it used to be. Use the calculator on your own figures.
What is the main advantage of a limited company?
Limited liability — your personal assets are protected if the business cannot pay its debts — plus control over when you extract profit and a more established image.
Can I switch from sole trader to limited company?
Yes, at any time. Incorporation reliefs can defer the tax on the goodwill and assets you transfer in, so it is worth planning the timing with an accountant.
Get expert eyes on your tax
Book a free 30-minute Tax Health Check — we review your situation, sense-check the figures and show you where you could save.
For guidance only — this factsheet does not constitute professional advice and is not a substitute for advice based on your specific circumstances. Whilst every care has been taken in its preparation, it may contain errors for which we cannot be responsible. Figures are for the 2025/26UK tax year (England, Wales & Northern Ireland) and may change. Last reviewed 6 June 2026.