How a sole trader is taxed
A single layer of tax: Income Tax through the normal bands, plus Class 4 National Insurance, currently 6% on profit between £12,570 and £50,270, and 2% above that. There's no separate business tax to register for; everything is reported through one Self Assessment return. The self-employed income tax calculator covers this in full, including the £1,000 Trading Allowance.
How a limited company is taxed
Potentially two layers. First, the company pays Corporation Tax on its own profit: 19% up to £50,000 of profit, 25% from £250,000 upwards, and Marginal Relief tapering the rate between the two (see the Corporation Tax calculator). Second, whatever the director actually takes out is taxed again personally - typically a small salary (Income Tax and National Insurance) plus dividends, which have their own tax-free Dividend Allowance (£500) and their own rates, currently 10.75% at the basic rate (work out the tax on a given amount with the dividend tax calculator). Profit left inside the company isn't taxed a second time until it's actually paid out.
Worked example: £60,000 of trading profit
Assumptions: no other income, England & Northern Ireland rates, a single director with no other employees (so Employment Allowance can't be claimed - see the FAQ below), a salary set at exactly the Personal Allowance, and all remaining company profit paid out as dividends the same year.
| Sole trader | Limited company | |
|---|---|---|
| Income Tax (personal) | £11,432 | £0 |
| Class 4 National Insurance | £2,457 | - |
| Employer National Insurance | - | £1,136 |
| Corporation Tax | - | £8,796 |
| Dividend tax | - | £3,977 |
| Total tax | £13,889 | £13,909 |
| Take-home | £46,111 | £46,091 |
At exactly this profit level, with this particular salary-and-dividends strategy, the two structures come out within a few pounds of each other, with the sole trader very slightly ahead. That's before accounting for the cost of running a company (accountancy and Companies House filing fees typically run to a four-figure sum a year), which would tip this specific example further towards the sole trader. Neither of those things is a general rule, though - see below.
Why the answer changes at different profit levels
Sole trader Income Tax keeps climbing: 20%, then 40%, then 45%, with Class 4 National Insurance stacked on top. Corporation Tax is capped at 25% regardless of how large the company's profit gets. At higher profit levels, or wherever profit is retained in the company rather than fully extracted every year (for example to reinvest, or to smooth income across good and bad years), a limited company typically becomes meaningfully more tax-efficient than a sole trader - the gap the worked example above shows at £60,000 widens considerably as profit rises.
What else matters, beyond the tax bill
- Limited liability - a company generally keeps your personal assets separate from business debts, which a sole trader doesn't get.
- Administration - a company has annual accounts and Companies House filings a sole trader doesn't, usually meaning an accountant's fee.
- Perception and contracts - some clients, particularly larger organisations, prefer or require dealing with a limited company.
- Flexibility - a company makes it easier to bring in investors, retain profit, or pay yourself unevenly across the year.
This worked example is illustrative, using one specific salary-and-dividend strategy at one profit level - real outcomes depend on your own circumstances, expenses, and how much you actually need to draw out each year. Get advice from an accountant before choosing a structure; tax is one factor among several.