# Sole Trader or Limited Company? What Changes for Tax in 2026/27 > Should you trade as a sole trader or a limited company? Compare 2026/27 tax rates, National Insurance, admin and liability to see which suits your profits. Last updated: 2026-11-08 *Blog | by Josh Clarke | October 2026* # Sole Trader or Limited Company? What Changes for Tax in 2026/27 ### Josh Clarke It is one of the most common questions we hear from people starting out and from sole traders whose business has grown: should I be a limited company? The honest answer is that it depends, and tax is only part of it. This guide walks through how each structure is taxed in 2026/27, what else changes beyond tax, and how to tell when it is worth making the move. The rates here are correct as we understand them at 29 October 2026, following the Autumn Budget on 28 October, which did not change the dividend or Class 4 National Insurance rates for 2026/27. ## What is the actual difference between a sole trader and a limited company? As a sole trader you and the business are the same person in law. You keep the profits, but you are also personally responsible for the business's debts, which GOV.UK describes as unlimited liability. A limited company is a separate legal entity owned by its shareholders, so the owners' exposure is generally capped at what they have invested, although personal guarantees and director duties can still create personal risk. That legal separation drives most of the practical differences. A company has to be registered before it starts trading, and its directors must run it under its rules, keep proper records and file accounts and tax returns. A sole trader can start trading without registering anything, although you must register for Self Assessment once you pass £1,000 of income in a tax year. ## How is a sole trader taxed in 2026/27? A sole trader pays Income Tax on the profit of the business, whether or not they take it out. The Personal Allowance is £12,570, after which profit is taxed at 20% up to £50,270, 40% up to £125,140 and 45% beyond that. On top of that comes Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above that. Class 2 is no longer compulsory for most people, and is only payable voluntarily if profits are below £7,105. As a simple example, a sole trader with £50,000 of profit and no other income would pay Income Tax of £7,486 (20% of £37,430) and Class 4 National Insurance of about £2,246 (6% of £37,430), a total of roughly £9,732. That ignores other income, reliefs and allowances, but it gives you a baseline to compare against. ## How is a limited company taxed in 2026/27? A limited company pays Corporation Tax on its profits first, at 19% on profits up to £50,000 and 25% on profits above £250,000, with marginal relief in between. You then take money out as a director, usually a mix of a small salary and dividends, and pay personal tax on what you receive. The first £500 of dividends is tax free, after which dividends 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. This is where the two layers come from. The company pays tax and then you pay tax on what you extract, so the structure tends to be most attractive when you do not need to draw all the profit out personally. Which mix of salary and dividends works best is a separate question, and our guide on [how to pay yourself from a limited company tax-efficiently](https://loveyouraccountants.com/knowledge/pay-yourself-limited-company-tax-efficiently) is a good place to start. ## So which one is cheaper? There is no single answer, and anyone who gives you one without knowing your numbers is guessing. At lower profit levels the tax difference is often modest, and once you add the cost of running a company the sole trader route can come out ahead. At higher profits, and especially if you want to leave money in the business to grow or build reserves, a company often starts to win. The tipping point depends on how much you personally need to draw, so the useful exercise is to model your own profit, not a generic one. ## What else changes besides tax? Admin is the big one. A company needs statutory accounts, a Corporation Tax return, a confirmation statement and usually a payroll, and the information it files is publicly available at Companies House. A sole trader has far fewer filings, though more of them are about to become digital. Making Tax Digital for Income Tax applies to sole traders and landlords based on their qualifying income. It started from 6 April 2026 for those with qualifying income over £50,000, extends to over £30,000 from 6 April 2027 and to over £20,000 from 6 April 2028. That means quarterly updates to HMRC through software, which is a real change in workload for a growing sole trader. A limited company's own profits are not what is measured, though any sole trader or rental income you have personally can be. ## Can you switch later? Yes, and plenty of people start as a sole trader and incorporate once the business is established. It is not as simple as flicking a switch though, because moving an existing business into a company can involve assets, contracts, VAT and sometimes capital gains tax, so it is worth planning the timing and the mechanics rather than doing it in a rush at year end. ## What does it cost to get help? Our fees for small limited companies are fixed monthly and start from £210 plus VAT, covering payroll, annual accounts, Corporation Tax, personal tax returns for the directors, bookkeeping, VAT and the Xero subscription. A personal tax return on its own also starts from £210 plus VAT. Fees scale with the complexity of the work rather than with your profit or revenue, so it is worth telling us what your business actually involves. If you do decide to incorporate, our guide to [accountants for limited companies](https://loveyouraccountants.com/knowledge/accountants-for-limited-companies) explains what a good service includes and what to expect. ## Five questions to ask before you decide Work through these honestly and the answer is often clearer than you expect: 1. How much of the profit do I actually need to take out personally each year? 2. Do I want to build up reserves or reinvest profit in the business? 3. Am I comfortable with the extra admin and with company information being public? 4. How much would personal liability for business debts worry me? 5. Will customers or lenders expect me to be a limited company? ## Frequently Asked Questions. ### Will I pay less tax as a limited company? Sometimes. A company can be more tax efficient when you leave profit in the business or when your profits are well above what you need to draw, but at lower profit levels the difference is often small and the extra admin can outweigh it. It depends on your own figures. ### Does a limited company protect my personal assets? Generally yes, because the company is a separate legal entity and your liability is capped at your investment. That protection is not absolute: personal guarantees to lenders or landlords, and breaches of director duties, can still expose you personally. ### Do limited companies have to use Making Tax Digital for Income Tax? No. That service covers sole trader and landlord income. Limited companies have their own filing obligations, and VAT-registered businesses of any type already use Making Tax Digital for VAT. ### Can I switch from sole trader to limited company later? Yes. Many businesses do once profits and risk increase. Moving an existing trade into a company needs planning, as it can involve transferring assets and contracts, VAT registration and in some cases capital gains tax. Need help? If you are weighing up sole trader against limited company and would like us to model your own numbers, feel free to contact us via our website and one of the team will come back to you. This guide is general information, and the rules and rates can change, so please speak to us before acting on it. Book a free consultation: https://loveyouraccountants.com/contact. Tags: corporation tax, dividends, limited companies, small business, startups, tax ![Josh Clarke, author at Love Your Accountants](https://loveyouraccountants.com/asset/2481/175-175-def/4a37688b-69ab-411b-810b-4fb6eba75354.jpg) **Author** ###### **Josh Clarke** Josh is our Chief Operating Officer, overseeing operations to ensure a smooth, responsive and high-quality service. With a practical, clear approach... [Read more](https://loveyouraccountants.com/team-bio/josh-clarke) --- ### Related Blogs - [Accountants for Contractors: A UK Guide for 2026/27](https://loveyouraccountants.com/knowledge/accountants-for-contractors) — How contractors choose an accountant in 2026/27: IR35, expenses, VAT, director pay and tax investigation cover explained in plain English. - [Accountants for Limited Companies: What You Should Expect in 2026/27](https://loveyouraccountants.com/knowledge/accountants-for-limited-companies) — What does an accountant do for a limited company? 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