Incorporate when you stop needing all the profit. That is the timing rule for 2026/27, and it has replaced the old advice about a magic turnover figure.
The reason is the 6 April 2026 dividend rise. Basic and higher dividend rates went up two percentage points, to 10.75% and 35.75%. Stack that on 15% employer National Insurance above a £5,000 secondary threshold, and on the fact that single-director companies cannot claim the £10,500 Employment Allowance, and the classic “low salary, high dividends” structure no longer beats sole trader treatment on money you actually spend.
What a company still does well is hold profit back. So the question is not “what do I earn?” It is “how much of it do I draw?”
The break-even is a drawings figure, not a profit figure
The table below assumes England, Wales or Northern Ireland, one person, no other income, a £12,570 salary that uses the Personal Allowance without triggering employee National Insurance, and everything else taken as dividends.
| Profit before owner’s pay | Sole trader tax | Draw up to this in total and the company is ahead |
|---|---|---|
| £50,000 | £9,731.80 | about £28,900 |
| £60,000 | £13,888.60 | about £49,900 |
| £75,000 | £20,188.60 | about £57,400 |
| £100,000 | £30,688.60 | about £68,300 |
Draw more than the right-hand figure and the sole trader pays less tax. Draw less and the company does.
How the £100,000 row works. Employer National Insurance on the salary is 15% of (£12,570 − £5,000) = £1,135.50. Profit chargeable to Corporation Tax is £86,294.50, taxed at 19% on the first £50,000 (£9,500) and an effective 26.5% on the next £36,294.50 (£9,618.04), so £19,118.04. Those two costs are fixed. To match the sole trader’s £30,688.60 the dividend tax can be no more than £10,435.06, which is reached at dividends of about £55,703 — total drawings of roughly £68,300, leaving about £11,500 in the company.
Two things fall out of this. At £60,000 the two structures are within £21 of each other even on full extraction, so at that level the tax comparison is not a decision. And at £50,000 you would have to live on £28,900 out of £50,000 for the company to pay, which most people will not do.
Tax left in the company is deferred, not cancelled. It becomes payable when you take it out as dividends later, or on a solvent liquidation where Capital Gains Tax rules apply. Retention is a timing advantage.
The reasons that are not about tax
These decide most real cases, and they do not depend on arithmetic.
Liability. A sole trader is personally responsible for all business debts. A company is a separate legal person and shareholder liability is normally limited to the value of the shares. Personal guarantees on borrowing and leases erode that in practice, and directors are not shielded from wrongful trading.
Contracts. Some clients — larger corporates, public bodies, most agencies — will only contract with a limited company. If that is your market the decision is made for you.
IR35. Incorporating does not remove employment status risk. Where you supply services through your own company to a medium or large private-sector client or a public body, the client determines your status and, if the engagement is inside the rules, deducts tax and National Insurance at source.
Cost. Annual accounts, a CT600, a confirmation statement, RTI payroll and Companies House identity verification all arrive together. Budget for a materially higher accountancy bill.
The mechanics, in order
Incorporating is not a form. It is a transfer of a business from one legal person to another.
1. Form the company. Companies House charges £100 to incorporate online, £124 on paper, and £156 for same-day incorporation through software. Fees rose on 1 February 2026.
2. Verify identity. Directors and PSCs must verify with Companies House through GOV.UK One Login or an authorised agent. This became a legal requirement on 18 November 2025, with per-role deadlines rather than one cut-off date.
3. Transfer the trade. Assets, contracts, leases and any employees move to the company, with employees transferring under TUPE. Get the contract novations done — an invoice raised by the company under an agreement still held personally causes problems later.
4. Incorporation relief — and the claim you now have to make. Under section 162 of the Taxation of Chargeable Gains Act 1992, if you transfer the business as a going concern with all of its assets (cash may be excluded) wholly or partly in exchange for shares, the gain on the assets is rolled into the base cost of the shares instead of being taxed now.
For transfers made on or after 6 April 2026 the relief is no longer automatic. You have to claim it. Finance Act 2026 section 39 inserted a new section 162(1)(b) requiring a claim, and that catches every incorporation this article is about. The deadline is the first anniversary of the 31 January following the tax year of the transfer — so a transfer in 2026/27 must be claimed by 31 January 2029. HMRC’s Capital Gains Manual at CG65700 puts it plainly: “For transfers taking place on or after 6 April 2026 a claim is required… Transfers of businesses occurring prior to 6 April 2026 did not require the making of a claim.”
An unclaimed relief is a lost relief. Miss the deadline and the whole gain on the transfer stays chargeable in the year you incorporated, with interest running from the original due date. Put the claim date in the file the day you sign the transfer agreement, not the week you get round to the return.
There is also nothing left to elect out of. Section 162A — the old written election to disapply the relief — was omitted by Finance Act 2026 section 39(4) for transfers on or after 6 April 2026. If the rollover does not suit you, you simply do not make the section 162 claim. (For a transfer made before 6 April 2026 the relief did apply automatically and the election out was still available, with the shortened deadline triggered by a disposal of all the shares received, not by any sale of some of them.)
5. Goodwill. This is where incorporations most often go wrong. Where a company acquires internally generated goodwill from a related individual or firm — which is exactly what a one-person incorporation is — section 879K of CTA 2009 denies relief outright. Not restricted, not tapered: no debit is allowable at all, so nothing can be written off against company profits. HMRC’s guidance says this “is expected to apply to most related party incorporations”.
A debit only ever arises if and when the company realises the goodwill, and section 879K(5) makes that realisation debit a non-trading debit — so it cannot be set against trading profits of the year or carried back. Do not build a plan around amortising goodwill, and take advice before putting a goodwill figure in the transfer agreement at all.
6. VAT. The company is a new legal person, so the registration does not follow automatically. You either transfer the existing VAT number or you cancel the old registration and register afresh. To transfer it, both parties complete form VAT68 and ask HMRC to move the number — VAT Notice 700/9 paragraph 3.3 lets you request the transfer using HMRC online services or by VAT68, which can be emailed as well as posted — and the company also registers under its new legal status. VAT68 is treated as the cancellation of the old registration. The transfer of a going concern conditions are mandatory in their own right, under section 49 of VATA 1994 and article 5 of SI 1995/1268, rather than because they appear in the notice: only Section 10 of Notice 700/9 has force of law. What paragraph 3.3 describes as legally binding is the consequence of moving the registration number — the company takes over the VAT liabilities attached to it.
7. Tell HMRC you have stopped being self-employed. There is an online form; you will need your National Insurance number and UTR. Close the PAYE scheme if you employed anyone, and call the CIS helpline if you were registered as a contractor or subcontractor.
8. File the final Self Assessment return. It needs your trading income to cessation, allowable expenses including closing-down costs, capital allowances including any balancing charges on assets transferred, any Capital Gains Tax on disposals, and the final profit or loss. Do not go looking for overlap relief: on the transition to the tax year basis every remaining overlap profit was given in 2023/24, so no overlap pool survives into 2026/27. If the final period runs at a loss, terminal loss relief under section 89 of ITA 2007 takes the loss of the final 12 months of trading and sets it against profits of the same trade for the year of cessation and the three preceding tax years, later years first.
9. Register the company for Corporation Tax and set up payroll. Company profits are outside Making Tax Digital for Income Tax; they run through Corporation Tax instead.
When in the year to do it
Mid-year incorporation means two tax computations for one year of trading and a final basis period that has to be got right. A 5 April or 31 March changeover is cleaner. If you are already in Making Tax Digital for Income Tax — mandatory since 6 April 2026 above £50,000 of qualifying income, with the £30,000 tier following on 6 April 2027 and the £20,000 tier on 6 April 2028 — you still need quarterly updates up to cessation and the year-end return.
Frequently asked questions
Is there a profit level at which I should automatically incorporate?
No. On 2026/27 rates, with all profit extracted as salary plus dividends, the sole trader pays less or the same across the £30,000 to £100,000 range. The break-even is a drawings figure: at £100,000 of profit you need to leave roughly £11,500 in the company for incorporation to save tax that year.
Do I have to pay Capital Gains Tax when I incorporate?
Not usually, and not immediately — but for transfers on or after 6 April 2026 you have to claim the relief. Incorporation relief under section 162 TCGA 1992 defers the gain where you transfer the business as a going concern with all of its assets, wholly or partly for shares: the gain reduces the base cost of your shares instead, so it resurfaces when you sell them. Finance Act 2026 section 39 made the relief claim-only, and the deadline for a 2026/27 transfer is 31 January 2029. Miss the claim and the gain is chargeable in the year you incorporated.
Can my company keep my VAT number?
Yes. You and the company both complete form VAT68 and ask HMRC to transfer the number — you can request it using HMRC online services, or send the VAT68 by email or post — and the company registers under its new legal status. You can instead cancel the old registration and get a new number. Either way the transfer of a going concern conditions apply, because they come from section 49 of VATA 1994 and article 5 of SI 1995/1268 rather than from the guidance. If you do move the number across, the company also takes over the VAT liabilities attached to it.
Will incorporating get me out of IR35?
No. Working through your own company does not change your employment status. For medium and large private-sector clients and public bodies, the client determines status and applies deductions where the engagement is inside the rules.
Can I go back to being a sole trader if it does not work out?
You can, but unwinding a company is slower and more expensive than forming one, and there are tax consequences to extracting the assets. If the case is finely balanced, staying a sole trader keeps your options open.
Getting the timing right
The arithmetic above is specific to 2026/27 and to one person with no other income. Add a spouse shareholder, a pension contribution, a second employee above the £5,000 secondary threshold, or Scottish Income Tax bands, and it moves. What no longer holds is the idea that crossing a turnover line is itself a reason to incorporate.
SmartFiling handles Self Assessment and MTD for Income Tax on a fixed fee, including the final return for a sole trade that has been incorporated. Every submission is reviewed by an ICAEW Chartered Accountant, and turnaround is three weeks from receiving your records.
