If you extract every pound of profit each year, incorporating no longer saves you tax at any of the profit levels most small businesses operate at. That is a genuine reversal, and it happened on 6 April 2026.
Three changes did it. Dividend rates rose two percentage points. Employer National Insurance sits at 15% on everything above £5,000. And single-director companies cannot claim the Employment Allowance that would once have absorbed that bill. Stack those on Corporation Tax and the classic “low salary, high dividends” structure now costs more than sole trader Income Tax and Class 4 across the basic and higher rate range.
The limited company still wins in specific situations. Here are the numbers, and the situations.
The 2026/27 rates this comparison runs on
| Item | 2026/27 |
|---|---|
| Personal Allowance | £12,570 |
| Basic rate (20%) | £12,571 – £50,270 |
| Higher rate (40%) | £50,271 – £125,140 |
| Class 4 NIC | 6% on £12,570 – £50,270, then 2% |
| Class 2 NIC | Treated as paid at profits of £7,105 or more |
| Corporation Tax | 19% to £50,000; 26.5% effective from £50,000 to £250,000; 25% above |
| Dividend rates | 10.75% basic, 35.75% higher, 39.35% additional |
| Dividend allowance | £500 |
| Employer NIC | 15% above a £5,000 secondary threshold |
| Employment Allowance | £10,500 — not available to single-director companies |
Dividend rates rose from 8.75% and 33.75% on 6 April 2026. Much published comparison content still uses the old figures, flattering the company side by two points on every distributed pound.
The comparison, with the arithmetic
Assumptions. England, Wales or Northern Ireland. One person, no other income, no pension contributions, no associated companies. The sole trader is taxed on the full profit. The company pays a £12,570 salary — the point that uses the Personal Allowance without triggering employee NIC — and distributes everything left after Corporation Tax as dividends in the same year.
| Profit before owner’s pay | Sole trader tax | Limited company tax | Difference |
|---|---|---|---|
| £30,000 | £4,531.80 | £5,596.55 | Company costs £1,064.75 more |
| £50,000 | £9,731.80 | £11,138.05 | Company costs £1,406.25 more |
| £75,000 | £20,188.60 | £21,596.31 | Company costs £1,407.71 more |
| £100,000 | £30,688.60 | £34,790.38 | Company costs £4,101.78 more |
How the £75,000 row is built
Sole trader. Taxable income is £75,000 − £12,570 = £62,430. The first £37,700 is taxed at 20% (£7,540) and the remaining £24,730 at 40% (£9,892), giving £17,432 of Income Tax. Class 4 is 6% on the £37,700 between £12,570 and £50,270 (£2,262) plus 2% on the £24,730 above (£494.60), so £2,756.60. Total £20,188.60.
Limited company. Employer NIC on the salary is 15% of (£12,570 − £5,000) = £1,135.50. Profit chargeable to Corporation Tax is £75,000 − £12,570 − £1,135.50 = £61,294.50. That sits in the marginal relief band: 19% on the first £50,000 (£9,500) plus 26.5% on the next £11,294.50 (£2,993.04) = £12,493.04. Distributable profit is £48,801.46. The salary uses the Personal Allowance, so the dividends are taxed from £nil: £500 covered by the dividend allowance, £37,200 at 10.75% (£3,999.00) and the remaining £11,101.46 at 35.75% (£3,968.77), giving £7,967.77 of dividend tax. Total £21,596.31.
Why the gap widens at £100,000
Compare marginal rates on the next pound.
| Sole trader | Limited company | |
|---|---|---|
| Basic rate zone | 26% (20% + 6%) | 27.71% (19% CT, then 10.75%) |
| Above £50,270 | 42% (40% + 2%) | 52.78% (26.5% CT, then 35.75%) |
Class 4 drops to 2% above £50,270 while Corporation Tax rises to an effective 26.5% and the dividend rate to 35.75%. The curves move in opposite directions. That explains most of the £4,101.78 gap at £100,000, and it widens as profits climb toward £250,000.
Scottish taxpayers, read this differently. Scotland sets its own Income Tax bands; National Insurance, Corporation Tax and dividend rates are UK-wide. The sole trader column changes materially — run your own numbers.
Where the limited company still pays
Retaining profit is the real advantage now. Take the £100,000 business again, with the owner needing only £40,000 to live on.
A sole trader is taxed on the whole £100,000 whether they draw it or not: £30,688.60.
The company pays a £12,570 salary and £27,430 of dividends. Employer NIC £1,135.50, Corporation Tax £19,118.04, dividend tax £2,894.98 — £23,148.52, a saving of £7,540.08 in the year. Roughly £39,746 stays in the company, and tax on that is deferred, not cancelled. It becomes payable when extracted as dividends later, or on a solvent liquidation where Capital Gains Tax rules apply.
The limited company advantage in 2026 is largely a timing advantage plus a set of non-tax benefits — not a lower headline tax cost on money you actually spend.
Two other cases favour incorporation: company pension contributions are deductible against Corporation Tax with no NIC charge, and profit taxed at the 19% small profits rate and reinvested is cheaper than the sole trader’s 26%.
The things that are not about tax
Liability. A sole trader has unlimited liability — you are personally responsible for all business debts. A limited company is a separate legal person, so shareholder liability is normally limited to the value of the shares. Personal guarantees on borrowing and leases erode that protection in practice, and directors are not shielded from wrongful trading.
Credibility. Some clients — larger corporates and public bodies in particular — will only contract with limited companies. If that is your market, the comparison ends there.
Privacy. This cuts the other way. Directors’ names, month and year of birth, service address and shareholdings are public, and so are the accounts. Sole trader profits are seen only by HMRC.
Admin. A sole trader files one Self Assessment return. A company files annual accounts, a CT600, a confirmation statement and RTI payroll submissions — plus the director’s own return where dividends make one due. Directors and people with significant control must also verify their identity with Companies House. Expect a meaningfully higher accountancy bill.
Simplified expenses. Sole traders can use HMRC’s flat rates for vehicles, home working and living at business premises, and can use cash basis accounting. Companies can do neither.
What MTD for Income Tax changes
Making Tax Digital for Income Tax went live on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, measured on the 2024/25 return. The £30,000 tier follows on 6 April 2027 and the £20,000 tier on 6 April 2028. Those in scope keep digital records and file quarterly updates by 7 August, 7 November, 7 February and 7 May, plus a year-end return.
Company profits are not in MTD for Income Tax — they run through Corporation Tax instead. Directors are still caught personally where their own qualifying self-employment or property income crosses the threshold.
Incorporating to sidestep MTD is a poor reason on its own. The record-keeping a company needs is not lighter, and the tax comparison above does not support it.
Frequently asked questions
At what profit level should I incorporate in 2026/27?
On the figures above there is no profit level at which full extraction as salary plus dividends beats sole trader treatment. Incorporation makes sense when you are retaining profit in the business, making substantial company pension contributions, need limited liability, or your clients require a limited company. Take advice on your own numbers before deciding.
Did dividend tax really go up?
Yes. From 6 April 2026 the basic rate is 10.75% and the higher rate is 35.75%, up from 8.75% and 33.75%. The additional rate stays at 39.35% and the dividend allowance stays at £500. A return filed by 31 January 2027 covers 2025/26 and still uses the old rates — the new rates first appear in the return due 31 January 2028.
Why can’t my company claim the £10,500 Employment Allowance?
A company is ineligible where the sole employee liable for secondary Class 1 National Insurance is also a director. That describes most one-person companies. Take on a second employee earning above the £5,000 secondary threshold and eligibility can change.
Is a sole trader’s tax bill really due all at once?
No, and this catches people out. Sole traders make payments on account on 31 January and 31 July, each half of the previous year’s Income Tax and Class 4 liability, unless the prior year’s bill was under £1,000 or more than 80% was collected at source. The first 31 January can be 150% of the tax you expected.
Can I switch from sole trader to limited company later?
Yes, and most people do it that way round. Incorporating is straightforward; unwinding a company is not. If the case is finely balanced, staying a sole trader keeps your options open.
Getting the decision right
The arithmetic here is specific to 2026/27 and to a single owner extracting everything. Change the assumptions — a spouse shareholder, retained profits, pension contributions, a second employee — and the answer moves. What no longer holds is the old rule of thumb about incorporating at around £30,000 to £50,000 of profit.
SmartFiling handles Self Assessment and MTD for Income Tax on a fixed fee, including quarterly updates where MTD applies and the year-end return. Every submission is reviewed by an ICAEW Chartered Accountant, and turnaround is three weeks from receiving your records.
