Sole trader or limited company: the tax, and everything the tax ignores

Why the company route now loses at modest profits on 2026/27 rates and wins again higher up, what a director actually pays on salary and dividends, the Employment Allowance trap for one-person companies, and the non-tax reasons that often decide it.

One lever among many. Optimising your plan shows every lever, which ones apply to you and how they interact.

For a decade the answer was reflexive: incorporate. Corporation tax was flat at 19%, dividends were lightly taxed, and a £12,570 salary plus dividends beat sole-trader tax at almost any profit. The rates have moved, and the reflex is now wrong for a large share of small businesses.

What changed

Corporation tax rose to 25% above £250,000 of profit with marginal relief from £50,000; dividend rates rose twice, to 10.75%, 35.75% and 39.35% with only £500 tax-free; and employer National Insurance rose to 15% from a £5,000 threshold. A one-person company cannot claim the £10,500 Employment Allowance if the director is its only employee above the threshold, so it pays that employer NI on a £12,570 salary in full. Meanwhile the sole trader's Class 4 NI fell to 6%. On £30,000 of profit the sole trader now keeps £1,715 more than a company paying a £12,570 salary and the rest as dividends; on £60,000, £670 more. Only at higher profits does the company pull ahead, and then by less than it used to: the calculator shows every line for your own figure.

What the tax comparison leaves out

Limited liability, which matters if the business can be sued or fail owing money; how clients, lenders and landlords treat each structure; IR35 if you contract through your own company; VAT, which is the same for both; the ability to leave profit in the company and draw it in a lower-income year; and above all employer pension contributions, which the company pays before corporation tax with no National Insurance at all: for a profitable business that wants to fund a pension, this alone can swing the decision. The pension tax relief calculator shows the personal-contribution side, the self-employed tax calculator the sole trader's full bill, and the dividend tax calculator the dividend side on its own.

Timing and the accountant

Incorporating part-way through a year, an existing sole-trader loss, a spouse who could hold shares, and the cost of running a company (accounts, filing, payroll, typically £900 upwards a year) all change the arithmetic, and the decision is hard to reverse cheaply. This is one of the few places where an accountant's fee is plainly worth paying, and the calculator's job is to make the conversation start from numbers rather than habit.

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