As a sole trader, the profit is your income. Income tax and Class 4 National Insurance apply to the whole lot, whether you spent it or left it in the business account. There is no separation between the money and you.

A limited company pays corporation tax on its profit first. As of 2026/27 that is 19% on small profits and 25% on the main rate, with marginal relief in between producing an effective rate of 26.5% on profits in the middle band. Then you decide what to take out, and that second step is where most of the planning sits.

Two things follow from that. Money you leave in the company is taxed once, at corporation tax rates, until you take it. And the total you pay depends on the extraction route: salary, dividends, employer pension contributions, or a mix.

This is why a plain comparison of headline rates tells you almost nothing. The same £120,000 of profit can produce quite different tax bills for two companies depending on how many shareholders there are, what salary runs through payroll, and whether the owner needs all of it this year.

From 6 April 2026 the basic rate of dividend tax rose to 10.75% and the higher rate to 35.75%. The additional rate stayed at 39.35%. On its own that is a couple of percentage points, and it does not reverse the case for incorporating. It does shrink the margin.

Employer’s National Insurance moved to 15% in April 2025, which matters to the salary side of the same decision. Between those two changes, the old default of a minimal salary topped up with dividends is no longer automatically the best answer for every company. Where employment allowance is available and profits sit in the marginal relief band, a higher salary can beat the dividend route, because salary reduces profit taxed at 26.5% while dividends do not.

We work that out per company rather than applying a rule. The right salary depends on how many directors are on payroll, whether employment allowance is in play, and where profits land against the thresholds. Any figure quoted in a general article, including the ones circulating this year, is a model, not your answer.

There is also more reporting. Directors of close companies now have to break out dividends from their own company on the self assessment return, with the company name, number, and their shareholding.

We do not take on sole traders below £150,000 turnover, and that is a deliberate line rather than a snobbery about small businesses. Below it, the tax saving from incorporating is often modest enough that the extra filing, the payroll, the separate bank discipline, and the accountancy fee absorb most of it.

Above it, two things usually happen at once. The sole trader is paying higher rate income tax on profit that never leaves the business, and the gap between that and corporation tax becomes real money. The business is also usually big enough that other questions arrive: VAT scheme, staff, equipment, a spouse who genuinely works in the business.

A worked example makes the point better than a percentage. Take a consultant with £150,000 of profit after expenses who only needs £70,000 to live on. As a sole trader, all £150,000 is taxed this year at personal rates. Through a company, the £80,000 left behind is taxed at corporation tax rates and stays available for the business, a pension contribution, or a year when work is thin.

If you need every pound of profit annually, run the comparison properly before assuming a company helps.

Any honest comparison of limited company vs sole trader tax has to price the other side of the ledger.

• Year-end accounts and a CT600 rather than a single self assessment return.
• A confirmation statement every year, and public accounts at Companies House.
• Payroll, real time information filings, and pension duties once you pay yourself a salary.
• A separate business bank account, kept genuinely separate, because a director’s loan account that drifts into overdraft creates its own tax charge.
• Your own self assessment return still, because dividends have to be declared.
• A higher accountancy fee, since there is more to do.

None of that is a reason to stay a sole trader if the saving is clearly bigger. It is a reason to check the size of the saving first. We have told people to stay as they are, and we will keep doing it, because a switch that nets a few hundred pounds a year is not worth the administration.

The other cost is attention. A company needs someone watching the dividend headroom and the corporation tax position through the year, not in the week the bill is due.

When a sole trader at the right size asks us, we run the incorporation review. It is a comparison on your figures, not a calculator with averages: what you pay now, what you would pay through a company at the same profit, what salary and dividend mix makes sense given who else is a shareholder, and what the VAT position would look like afterwards.

The VAT part often matters more than people expect. One procurement consultant we reviewed had almost nothing in box 4, because his costs were overseas software and reverse-charge services. Moving him from the standard scheme to the flat rate scheme cut the VAT bill every quarter with no change to turnover. That kind of thing sits alongside the structure question, not after it.

If the numbers say incorporate, we handle the formation and the changeover. If they say stay put, we say so plainly and explain why. Either way you get the figures in writing, so the decision is yours rather than a rule of thumb you inherited from someone else’s business.