A tax comparison puts the same profit through two systems and shows what reaches you.

As a sole trader, you pay income tax and Class 4 National Insurance on every pound of profit. It makes no difference whether you drew the money or left it in the business account. Profit is income, and the bill follows in January and July.

A company splits the same profit into two layers. The company pays corporation tax. You then pay dividend tax on what you take out, plus income tax and National Insurance on any salary. Profit left inside the company is taxed once, for now.

That second layer settles most of the argument. If you need every pound of profit to live on, you meet both layers on the lot and the advantage narrows. If you can leave money in the company for a van, a hire, or a slow quarter, the timing starts working in your favour.

So the honest version of the question is not which structure taxes profit less. It is how much of your profit you actually need in your own bank account this year.

The gap opens once profit runs past what you need to take out.

Corporation tax for the 2026 tax year runs at 19% on profits under £50,000 and 25% on profits over £250,000. Between those two limits, marginal relief tapers the rate using the standard fraction of 3/200, which puts an effective rate of around 26.5% on the middle slice.

Set that against sole trader taxation. Once your profit passes the higher rate threshold, the next pound carries income tax at 40% plus Class 4 National Insurance, drawn or not. A pound retained in a company at 19% against a pound taxed at 40% in your own name is a wide gap, and it compounds.

Below the higher rate threshold, my answer to most people is to stay put. The saving is thin, and the extra accounts, payroll and filing eat it. I would rather tell a sole trader that nothing needs to change than sell a company formation that does little.

Past that threshold, with profit you can genuinely leave in the business, the case gets serious.

The standard owner-director plan is a modest salary topped up with dividends, and the rates under it moved this April.

From 6 April 2026, dividend income is taxed at 10.75% in the basic rate band, up from 8.75%, and 35.75% in the higher rate band, up from 33.75%. The additional rate stays at 39.35%. Employer’s National Insurance has been 15% since April 2025, which makes salary above the secondary threshold a more expensive way to extract profit.

There is a visibility change too. From the 2025/26 self assessment return, directors of close companies report dividends from their own company separately, giving the company name, its registration number, and the percentage of share capital they hold.

None of this reverses the comparison. A company still taxes retained profit far more lightly than a sole trader’s marginal rate. It does mean the extraction plan needs checking every year rather than being copied forward. Where a second director genuinely works in the business, a higher salary can now beat the old low-salary default once the employment allowance is in play. Any optimal salary figure you read on a forum is modelled on somebody else’s profile, not yours.

Tax is one column. The switch brings obligations that never appear in the saving someone quotes at you.

• Your accounts go on public record at Companies House, along with a confirmation statement every year.
• A payroll scheme, RTI submissions and pension duties, even if you are the only person on it.
• A director’s loan account that has to be watched, because money taken outside salary and dividends can trigger section 455 tax.
• Off-payroll rules, if you contract through agencies or large end clients.
• A tighter bookkeeping routine, because the company’s money is no longer yours to move at will.

There is also the cost of doing it properly. Company accounts, a CT600 and payroll cost more to prepare than a sole trader return. That is fair to put on the sheet, and if the tax saving barely covers it, the answer is no.

The mistake I see most often is an incorporation done on the tax number alone, with nobody explaining the director’s loan account. Eighteen months later the drawings are a mess and the section 455 charge arrives unannounced.

Two owners with the same turnover often land in different places, and the reasons are rarely exotic.

What matters is how much you need to draw, whether a spouse or partner genuinely works in the business, whether you want company pension contributions, and what you plan to do with retained profit. A contractor saving for a deposit has a different answer from one funding equipment and a second employee.

The structure question also rarely arrives on its own. One procurement consultant came to us on the standard VAT scheme with box 4 almost empty, because his costs were overseas software and reverse-charge services. Moving him to the flat rate scheme brought the quarterly VAT bill down with no change to turnover. His company structure was fine. The scheme sitting on top of it was not.

That is why I run structure, VAT scheme, and salary and dividends as one review rather than three separate conversations. Change one and the other two move.