Turnover gets used as the trigger because it is the easiest number to say out loud. It is also the one that changes the answer least.

A limited company pays corporation tax on profit. The small profits rate is 19% on profits up to £50,000, the main rate is 25% above £250,000, and marginal relief applies in between. A sole trader pays income tax and Class 4 National Insurance on the same profit, at rates that rise as the profit rises.

So two businesses with identical turnover can sit on opposite sides of the decision. A trades business with staff, materials and vehicles might show £45,000 of profit on £250,000 of sales. An IT contractor with a laptop and a software subscription might show £120,000 of profit on £150,000 of sales. The contractor has far more to gain from incorporating, and the tighter profit thresholds matter more to them.

One caveat worth knowing: the £50,000 and £250,000 thresholds are divided by the number of associated companies you control. Owners with a second company are often surprised by this when the first corporation tax computation arrives.

Here is the part that gets skipped. A limited company is tax efficient when you do not need all the profit personally.

If you draw every penny out, you pay corporation tax on the profit and then dividend tax on what comes out. Stack those together and the advantage narrows considerably. If you can leave a meaningful slice in the company, to fund a hire, buy equipment, build a cash buffer or smooth a lumpy year, the company holds that money at 19% or 25% rather than at your marginal income tax rate.

That is the real question we put to sole traders thinking about switching. Not what you earn. What you spend.

Dividend rates are also moving. From 6 April 2026 the ordinary dividend rate rises to 10.75% and the upper rate to 35.75%, with the additional rate unchanged at 39.35%. The dividend allowance stays as it is. That shifts the balance a little for owners who draw everything, and hardly at all for owners who reinvest. It is a reason to run the comparison on your own figures rather than on an article written two years ago.

Plenty of businesses are better off as they are, and we say so.

• Profit under roughly £50,000 with everything drawn. Once you add accountancy fees, payroll, a confirmation statement and the discipline of separate bank accounts, the tax difference can be swallowed whole.
• Lumpy income with no overheads. If the money goes straight out as living costs, the company is a wrapper with no purpose.
• Businesses planning to stop. Closing a company properly takes time and costs money. Ceasing as a sole trader takes a tax return.
• Owners who will not run it properly. A company that is treated as a personal bank account creates director’s loan problems, and the loans to participators charge is tied to the dividend upper rate, so it rises to 35.75% too.

The counterweight is limited liability. A company is a separate legal person, so business debts sit with it rather than with you personally. For a consultant with professional indemnity cover that matters less than it does for a construction firm carrying retentions, subcontractors and site risk. Some contracts and agencies also insist on a limited company before they will engage you at all, which settles the question without any tax arithmetic.

Incorporating is the moment to look at VAT properly, because the registration carries across and the scheme rarely gets reviewed again.

One of our clients is a procurement consultant running a limited company. During his set-up review we looked at box 4 on his VAT returns and it was almost empty. His costs were overseas software and reverse-charge services, so he had barely any input VAT to reclaim while handing over the standard rate on every invoice. We moved him to the flat rate scheme. His VAT bill fell every quarter, with no change to turnover and no change to what he charged.

Nobody had checked. He had been on the standard scheme since the day he registered, because that is the default and the default is what you get when your accountant only speaks to you at year end.

The same logic runs the other way for trades and construction businesses buying materials. They usually want the input VAT, and flat rate would cost them. The point is that the scheme should follow your actual cost profile, and the structure decision is the natural time to test it.

When a sole trader at £150,000 or more asks us about incorporating, we run the comparison on their figures rather than on averages. Five things go into it.

1. Profit after real costs for the last full year, and the current year to date.
2. What you draw personally, and what you could leave in the business if the tax made it worth it.
3. Your VAT position, including which scheme suits your cost mix.
4. A salary and dividend plan for the coming year, including how much headroom you would have.
5. What it takes to switch: formation, transferring the trade, contracts, bank, VAT and insurance.

You end the review with a number for each option and the reasoning behind it. Sometimes the answer is that incorporating would save you a few hundred pounds and cost you more in fees and admin than it returns, in which case we tell you to stay put. That happens more often than the internet suggests.

If the answer is yes, the useful part is the timetable. Getting the switch done at a sensible point in your tax year, with the VAT and payroll set up correctly from day one, avoids a year of tidying up afterwards.