In 2026/27, a limited company no longer automatically beats being a sole trader on tax. If you draw out every pound of profit, the sole trader route often leaves you with more cash. A company earns its keep when you leave profit in the business, put money into a pension, or need what a company structure brings beyond tax.
That is a big shift from the advice most freelancers and agency founders heard five years ago. Since April 2025, employer National Insurance [NI] has risen to 15% on salaries above £5,000. From 6 April 2026, dividend tax rose by two percentage points at the basic and higher rates. Together, those changes have narrowed, and often reversed, the old gap.
This guide walks through how each structure is taxed, shows the numbers side by side, and covers the non-tax points that often decide it. All figures are for the 2026/27 tax year in England, Wales and Northern Ireland.
How a sole trader is taxed
As a sole trader, you and the business are the same person for tax. You pay Income Tax and NI on your profit, whether you take the money out or leave it in the bank.
|
Charge |
2026/27 rate | Applies to |
|---|---|---|
|
Personal Allowance |
0% | First £12,570 of profit |
|
Income Tax, basic rate |
20% |
Next £37,700 (profit up to £50,270) |
|
Income Tax, higher rate |
40% |
Profit from £50,271 to £125,140 |
|
Class 4 NI |
6% |
Profit from £12,570 to £50,270 |
| Class 4 NI | 2% |
Profit above £50,270 |
| Class 2 NI | £3.65 a week, voluntary |
Only if profit is below £7,105 |
Class 2 NI is no longer compulsory. If your profit is £7,105 or more, you get the State Pension credit without paying it. Below that, paying voluntarily at £3.65 a week can be a cheap way to protect your record.
Everything is settled through one Self Assessment return, due by 31 January after the tax year ends. Payments on account mean many sole traders pay towards next year’s bill at the same time, so budget for it.
How a limited company is taxed
A limited company pays its own tax, and you then pay personal tax on whatever you take out. Most owner-directors take a small salary and the rest as dividends.
Step 1: Corporation Tax on profit. Companies with profit of £50,000 or less pay 19%. Above £250,000, the main rate of 25% applies. In between, marginal relief tapers the rate up, so each extra pound in that band is taxed at an effective 26.5%.
Step 2: a director’s salary. Salary is a business expense, so it saves Corporation Tax. The usual choice is £12,570, which uses your Personal Allowance with no Income Tax or employee NI. But employer NI of 15% now applies above £5,000. On a £12,570 salary that is £1,135.50 a year. Companies where the director is the only employee cannot claim the Employment Allowance to offset it. Some directors therefore choose a £5,000 salary instead; the right answer depends on your circumstances.
Step 3: dividends from post-tax profit. Dividends carry no NI, but the rates have just gone up.
|
Dividend band |
2026/27 rate | 2025/26 rate |
|---|---|---|
|
Dividend allowance (first £500) |
0% |
0% |
|
Basic rate (total income up to £50,270) |
10.75% |
8.75% |
|
Higher rate (£50,271 to £125,140) |
35.75% |
33.75% |
| Additional rate (above £125,140) | 39.35% |
39.35% |
The company files annual accounts, a Corporation Tax return and a confirmation statement. You still file a personal Self Assessment return for your dividends.
The numbers side by side
If you take out all your profit, the sole trader comes out ahead at every level below. The table assumes a £12,570 director’s salary, the rest as dividends, and no other income.
|
Profit before tax |
Sole trader: total tax | Sole trader: take-home | Limited company: total tax | Limited company: take-home | Difference |
|---|---|---|---|---|---|
|
£30,000 |
£4,532 | £25,468 | £5,597 | £24,403 |
Sole trader +£1,065 |
|
£50,000 |
£9,732 | £40,268 | £11,138 | £38,862 |
Sole trader +£1,406 |
| £100,000 | £30,689 | £69,311 | £34,790 | £65,210 |
Sole trader +£4,101 |
Limited company tax includes employer NI on the salary, Corporation Tax and dividend tax. Accountancy fees, which are usually higher for a company, are not included, so the real gap is a little wider.
Where the company wins: profit you leave in the business
The picture changes when you don’t need every pound personally. Take an agency owner with £80,000 of profit who needs about £46,000 a year to live on.
- As a sole trader, all £80,000 is taxed now. Take-home is £57,711, with £22,289 paid in tax.
- Through a company, the director takes a £12,570 salary and £37,700 of dividends, staying within the basic rate band. Dividend tax is £3,999 and personal take-home is £46,271. A further £14,776 stays in the company after Corporation Tax.
That retained profit has only paid Corporation Tax. It can fund hires, equipment or a quieter year, or be paid into a pension. The same slice of profit earned as a sole trader would have faced 42% in Income Tax and NI.
The lesson: compare structures on what you actually plan to draw, not on headline profit. That is exactly what our comparison template is built to do.
Beyond tax: what else should decide it
For many agency founders, the deciding factor isn’t tax at all. These are the points we talk through with clients most often.
|
Consideration |
Sole trader | Limited company |
|---|---|---|
|
Personal liability |
You and the business are one; business debts can reach your personal assets |
A separate legal entity; liability is usually limited to what you invested, though lenders and landlords often ask for personal guarantees |
|
Admin |
Register with HMRC, keep records, file one Self Assessment return |
Companies House accounts and confirmation statement, Corporation Tax return, payroll and dividend paperwork |
|
Privacy |
Your finances stay between you and HMRC |
Directors, shareholders and accounts are on the public register, and directors must verify their identity |
|
Cost |
Lower accounting fees and no filing costs |
Higher accounting fees, set-up and filing costs |
|
Credibility |
Fine for smaller clients; some corporates see it as less established |
Many corporate clients and procurement teams prefer to contract with a company |
|
Off-payroll working rules (IR35) |
Not directly relevant |
Working through your own company brings IR35 into play for contractor-style work |
|
Taking money out |
Draw what you like; you’re taxed on profit regardless |
The money belongs to the company and comes out as salary, dividends or a recorded director’s loan |
|
Bringing in partners or investors |
You can’t issue shares | You can issue shares to partners, key staff or investors |
|
Selling the business |
You sell individual assets; the business ends with you |
Shares can be sold or passed on, and the company carries on |
|
Pensions |
Personal contributions with tax relief |
Employer contributions are a deductible business expense |
|
Mortgages |
Lenders look at your tax returns (SA302s) |
Lenders look at salary and dividends; a low salary can mean specialist lenders |
|
Switching later |
Moving to a company is straightforward |
Going back means closing or striking off the company |
| Business name | No formal protection | Registration at Companies House protects the name |
If you plan to grow an agency, hire, bring in partners or sell one day, a company is usually the right home regardless of the tax maths. If you are a solo freelancer drawing everything you earn, staying a sole trader may now be simpler and cheaper.
Run your own numbers
Every agency is different, so we built a comparison model to test your figures. You enter your expected monthly income, running costs, director’s salary and accountancy fees. It then works out, side by side:
- Corporation Tax, dividend tax and take-home pay through a limited company
- Income Tax, Class 4 NI and take-home pay as a sole trader
- the tax you should set aside for each deadline, so January and Corporation Tax bills don’t catch you out
One thing to watch: if your turnover goes over £90,000 in any rolling 12 months, you must register for VAT whichever structure you choose.
Talk to us. MAP is the finance function for digital and creative agencies. We’ll run the model with you, look at what you plan to draw, retain and invest, and give you a clear recommendation. Get in touch at wearemap.co.uk.
This article is general guidance based on 2026/27 rates and thresholds for England, Wales and Northern Ireland. It isn’t tailored advice; please speak to us before making a decision.
Sources
- Rates and thresholds for employers 2026 to 2027, HMRC
- Self-employed National Insurance rates, GOV.UK
- Corporation Tax rates, GOV.UK
- Dividend rates 2026–27, CCH/Croner-i
