When To Switch From Sole Trader To Limited Company

Switching from sole trader to limited company is a decision most answers to this are vague about. “It depends,” or “once you’re earning enough.” This post tries to do better: it uses the actual verified 2026/27 Corporation Tax, dividend tax, Income Tax and National Insurance rates to show roughly where the numbers move in a limited company’s favour, and roughly where they don’t.

For the fuller comparison of liability, admin burden, and which structure suits which situation, see our sole trader vs limited company guide. This post is narrower: just the tax maths, and when it starts to matter.

Read the disclaimer at the end before acting on anything here. Every calculation below is illustrative, built on simplified assumptions, and no substitute for your own accountant running your actual numbers.

The 2026/27 tax rates that decide sole trader vs limited company

Sole trader (Income Tax + Class 4 NI): we’ve verified these already for the site: Personal Allowance £12,570, basic rate 20% up to £50,270, higher rate 40% above that; Class 4 NI at 6% up to £50,270, then 2% above (gov.uk, gov.uk). Full detail in our Income Tax rates and self-employed NI posts.

Corporation Tax, for financial year 2026: small profits rate 19% on profits up to £50,000; main rate 25% on profits over £250,000; profits in between get marginal relief, which works out at an effective marginal rate of 26.5% on that middle slice (gov.uk, gov.uk).

Dividend tax, 2026/27: a £500 tax-free dividend allowance, then rates of 10.75% (basic), 35.75% (higher) and 39.35% (additional) (gov.uk). These dividend rates rose by 2 percentage points from April 2026, worth flagging if you’ve seen older figures elsewhere online (gov.uk).

Illustrative example: £60,000 profit, both ways

To make this concrete, and this is a simplified illustration rather than a personalised calculation: take a single-director business with £60,000 profit, no other income, drawing out everything earned each year.

As a sole trader: Income Tax £11,432.00 + Class 4 NI £2,456.60 = £13,888.60 total (23.1% effective rate).

As a limited company, paying a director’s salary of £12,570 (the efficient level — equal to both the Personal Allowance and the employee NI threshold, so no personal tax or employee NI on it):

• Employer NI on the salary above the £5,000 secondary threshold: £7,570 × 15% = £1,135.50 (gov.uk)
• Taxable company profit after deducting salary and employer NI: £46,294.50, under £50,000, so the 19% small profits rate applies in full: £8,795.96 Corporation Tax
• Remaining £37,498.54 paid as dividend: £500 tax-free, remainder at 10.75% = £3,977.34 dividend tax
• Total: £13,908.80 (23.2% effective rate)

(Note: single-director companies with no other employees can’t claim the £10,500 Employment Allowance against that employer NI, it’s specifically excluded, so that relief isn’t included above.)

At £60,000, drawing out 100% of profit every year, the two routes land within about £20 of each other. That’s the headline finding worth sitting with: there is no clean profit figure where a limited company suddenly becomes cheaper, if you’re taking all the money out regardless of structure.

So why do people still switch to a limited company?

The move from sole trader to limited company isn’t just about the headline tax rate, it comes from not having to:

• Retained profit. A sole trader is taxed on all profit the moment it’s earned, spent or not. A company only pays Corporation Tax (19-26.5%) on profit it keeps: no personal tax is due until you draw it out, which can mean real deferral if you don’t need the full amount this year.
• Income splitting. A second shareholder (e.g. a spouse) with their own dividend allowance and basic-rate band can meaningfully lower the household total, figures are individual, so this needs proper advice.
• Employer pension contributions, paid by the company as a deductible expense instead of from taxed personal income, outside the scope of this post, but worth raising with an accountant.

For the non-tax reasons (liability protection, credibility, mortgage/lending treatment, extra admin) see our full comparison post.

What about higher profits, say, £100,000+?

Above £100,000, a sole trader’s Personal Allowance tapers away: £1 lost for every £2 of income over that threshold, gone entirely by £125,140 (gov.uk). Combined with the 40% rate and 2% NI, that pushes the effective marginal rate on that slice above 60%. A limited company doesn’t dodge this trick for money you draw out personally. Dividends count toward the same taper, but it does let you simply leave that slice in the business instead, which a sole trader can’t do.

A practical checklist rather than a magic number

You’ll sometimes see “£30,000” or “£40,000 profit” quoted as the point to move from sole trader to limited company. That’s professional convention among accountants, not a gov.uk figure, and our £60,000 example above shows why it’s a soft one: it’s not really about the number itself, it’s about whether you meet these conditions:

• Profit is consistently above roughly £30,000-£40,000 (rough rather than official)
• You can leave some profit in the company rather than drawing it all out
• You’re willing to take on payroll, Corporation Tax and annual accounts admin
• Limited liability or client perception matters for your work

Disclaimer

This post on switching from sole trader to limited company is illustrative only instead of personalised tax advice. It assumes a single director, no other income, England/Wales/NI rates (Scotland’s Income Tax bands differ), and a specific salary/dividend split that may not suit your situation. Get an accountant to run your actual numbers before switching structure.

One nuance on names: registering a company protects the exact company name at Companies House, but brand protection is a different tool, a registered trade mark, and the case for it doesn’t change with your structure.

One cost that arrives with incorporation is an address. The company needs a registered office on the public register, and your home is the wrong choice for it. Registered office address: what it costs and who needs one covers the Companies House rules and the two cheapest services.

Sources

• Income Tax rates and Personal Allowances: gov.uk
• Income Tax: Personal Allowance and income over £100,000 — gov.uk
• National Insurance: how much you pay, gov.uk
• Corporation Tax rates. Gov.uk
• Marginal Relief for Corporation Tax, gov.uk
• CTM03925, Marginal Relief standard fraction: gov.uk (HMRC manual)
• Tax on dividends, gov.uk
• Changes to tax rates for dividend income from April 2026. Gov.uk
• Rates and thresholds for employers 2026 to 2027, gov.uk
• Single-director companies and Employment Allowance: gov.uk

Reviewed 26 August 2026. This is general information about how the rules work, not tax advice. The links above go to the primary sources; for your own circumstances, speak to an accountant or contact HMRC directly.