Should I Switch From Sole Trader to a Limited Company in 2026/27?

Company Startup· October 30, 2026 · 5 min read

For most sole traders, switching to a limited company in 2026/27 no longer delivers the tax saving it once did. With dividend tax rates now at 10.75% and 35.75%, employer’s National Insurance at 15% and a dividend allowance of just £500, a business making around £60,000 keeps almost exactly the same money either way — our worked example below shows a gap of about £20 a year. The decision now rests on liability protection, how much profit you leave in the business, and your growth plans, rather than headline tax.

What changed in April 2026?

The Autumn Budget 2025 made the company route noticeably less generous from 6 April 2026. The key 2026/27 figures, all confirmed on gov.uk, are:

Dividend tax rose by two percentage points to 10.75% (basic rate) and 35.75% (higher rate); the additional rate stays at 39.35%. The tax-free dividend allowance remains £500.
Corporation Tax is unchanged: 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between.
Employer’s National Insurance is 15% on salaries above £5,000 a year.
The personal allowance stays frozen at £12,570, and the higher-rate threshold at £50,270.

How you are taxed as a sole trader in 2026/27

As a sole trader, your business profit is simply your personal income. You pay income tax at 20% on taxable profits up to £37,700 (after the £12,570 personal allowance), 40% up to £125,140 and 45% above that. On top, you pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above that. Class 2 National Insurance is no longer payable — if your profits are over £7,105 you get your State Pension credit automatically, and below that you can pay £3.65 a week voluntarily.

How you are taxed through a limited company

A company pays Corporation Tax on its profits — 19% for most small companies — and you then pay personal tax on whatever you take out. The classic approach is a director’s salary of £12,570 (covered by your personal allowance and deductible against Corporation Tax) with the rest taken as dividends. Two catches are easy to miss: the company pays 15% employer’s National Insurance on salary above £5,000, and a company whose only employee is its director cannot claim the £10,500 Employment Allowance to offset it.

Worked example: £60,000 profit in 2026/27

Staying a sole trader

Income tax: £7,540 at 20% plus £3,892 at 40% = £11,432
Class 4 National Insurance: £2,262 at 6% plus £195 at 2% = £2,457
Total tax and NI: £13,889 — take-home £46,111

Through a limited company (salary of £12,570, rest as dividends)

Employer’s NI on the salary: £1,136
Corporation Tax at 19% on the remaining £46,295 profit: £8,796
Dividends of £37,499; dividend tax at 10.75% after the £500 allowance: £3,977
Total tax across company and director: £13,909 — take-home £46,091

The difference is roughly £20 a year — in the sole trader’s favour. Before April 2026 the company route saved over £700 at this profit level; the dividend rise has wiped that out. You can test your own numbers with our free Salary & Dividend Tax Calculator or the Take-Home Pay Calculator.

When is a limited company still worth it?

Incorporation is far from dead — it just needs a better reason than saving a few hundred pounds. A company still makes sense when:

You leave profit in the business. Retained profits are taxed at 19% Corporation Tax rather than up to 42% or 47% in income tax and NI, which is powerful if you are funding growth, equipment or a future property deposit inside the company.
You want limited liability. If the business fails or is sued, your personal assets are generally protected — a sole trader has no such shield.
Clients or contracts require it. Many agencies, construction main contractors and corporate clients will only engage limited companies.
You plan to raise investment or sell. Share structures, SEIS/EIS relief for investors and Business Asset Disposal Relief on exit all need a company.
You want larger pension contributions. Employer pension contributions paid by your company are deductible for Corporation Tax and free of NI.

Conversely, if your profits are modest and you draw everything out to live on, staying a sole trader in 2026/27 is usually simpler and now rarely costs you anything in tax.

Do not forget the running costs of a company

A limited company brings statutory accounts and a Corporation Tax return, a confirmation statement, payroll filings, dividend paperwork, and your details on the public register at Companies House. Accountancy fees are typically higher than for a sole trader. If you are weighing it up, our company formation service handles the incorporation and registrations end to end, while our sole trader accountants can run the comparison on your actual figures before you commit. The official guide to setting up a limited company is on GOV.UK.

Frequently asked questions

Can I still save tax by switching to a limited company in 2026/27?

At profits between roughly £30,000 and £70,000, where everything is drawn out to live on, the saving has largely disappeared since the April 2026 dividend tax rise. Meaningful savings remain where profits are retained in the company or where employer pension contributions are used.

What are the dividend tax rates for 2026/27?

Dividends above the £500 allowance are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band.

Do I pay Corporation Tax and dividend tax on the same profits?

Yes. The company pays Corporation Tax first — 19% on profits up to £50,000 — and you then pay dividend tax personally on what you draw out of the taxed profit. Both layers together are what you should compare against a sole trader’s income tax and National Insurance.

Written by the Accountactical Team — ACCA-Approved Accountants, London. Questions about your own situation? Call us on 020 3996 8302 or email info@accountactical.co.uk.

This article is general information for UK small-business owners, not formal tax advice — speak to an accountant before acting on it.