Sole trader vs limited company for tradespeople

For years the standard advice was "go limited once you earn over £30,000". For a one-person trade business in 2026/27, that advice no longer holds when you draw out all your profit. Here are the real numbers, worked through with GOV.UK rates for the 2026/27 tax year, checked on 12 October 2026.

What is the difference, in short?

Who should think about this?

This guide is for one-person trade businesses: the self-employed electrician, plumber, builder, roofer or cleaner wondering whether to incorporate. If you are just starting, our guide on how to become a self-employed tradesperson covers the first steps. Most people start as sole traders because it is free, simple and easy to change later.

The question matters most if:

• your profit is comfortably above what you need to live on,
• you take on big commercial contracts where a client asks for a limited company, or where the risk of a claim is high,
• you plan to employ staff and grow, or
• you are approaching £100,000 of profit, where sole traders start losing their Personal Allowance.

You can also change your mind. Plenty of tradespeople start as sole traders, build up steady work and incorporate a few years later, once profit is reliably above what they need to live on. Moving the other way, from a company back to sole trader, is possible but involves closing the company properly, so it is worth getting the first decision roughly right.

Scotland has its own income tax bands for sole traders and salaries, so the sole trader side of the comparison is different there. Corporation Tax, National Insurance and dividend tax are the same across the UK.

How do you decide and switch, step by step?

1. Work out your expected profit and how much of it you need to live on each year.
2. Run both calculations using the 2026/27 rates below, or ask an accountant to.
3. Weigh the non-tax points: liability, client requirements, admin, privacy and CIS cash flow.
4. If you go limited, register the company online with Companies House (£100, usually within 24 hours).
5. Register for Corporation Tax and set up payroll for your director's salary.
6. Open a business bank account in the company's name. Company money is not your money.
7. Re-register for CIS and VAT in the company's name, if you are registered, and tell your contractors and customers.
8. Close your sole trader business with HMRC and file your final Self Assessment return.

What are the 2026/27 rates, costs and deadlines?

Company running costs include the £50 confirmation statement (filed online) each year and usually higher accountancy fees. Corporation Tax is due 9 months and 1 day after the end of the company's accounting period.

Worked example: £30,000, £50,000 and £80,000 profit

Assumptions: one person, no other income, England, 2026/27 rates. The company pays a £12,570 salary (no employee NI, but £1,135.50 employer NI because there is no Employment Allowance), then pays out everything left after Corporation Tax as dividends. We ignore pension contributions, accountancy fees and student loans. Figures are rounded to the nearest pound.

How the £50,000 figures work

• Sole trader: income tax (£50,000 minus £12,570) × 20% = £7,486. Class 4 NI (£50,000 minus £12,570) × 6% = £2,245.80. Take-home £40,268.
• Company: profit £50,000 minus salary £12,570 minus employer NI £1,135.50 = £36,294.50 taxable. Corporation Tax at 19% = £6,896. That leaves £29,399 for dividends. The first £500 is tax free and the rest is taxed at 10.75% = £3,107. Take-home: £12,570 salary + £29,399 dividends minus £3,107 = £38,862.

How the £80,000 figures work

• Sole trader: income tax is £7,540 on the basic rate band plus £11,892 at 40% on £29,730, so £19,432. Class 4 NI is £2,262 at 6% plus £594.60 at 2%. Total £22,289, take-home £57,711.
• Company: taxable profit is £66,294.50 after salary and employer NI. That falls between £50,000 and £250,000, so Corporation Tax is 25% minus marginal relief (3/200 of the gap to £250,000), which comes to £13,818. Dividends of £52,476 are taxed at 10.75% up to the basic rate limit and 35.75% above it, a total of £9,282. Take-home £55,765.

When the company wins: leaving money in

At £80,000 profit, say you only need £46,000 a year to live on. As a company, you take the £12,570 salary and £37,700 of dividends (staying in the basic rate band). Dividend tax is £3,999, so you take home £46,271, and about £14,776 stays in the company, already taxed at Corporation Tax rates, for a new van, a quiet winter or your pension. As a sole trader, you would pay higher rate tax on all £80,000 whether you spent it or not. If you later take that retained money as higher rate dividends, the advantage shrinks, so the company works best when the money stays in the business or goes into a pension.

Would a lower salary help?

Some directors pay themselves £5,000 to avoid employer NI. At £50,000 profit that gives: Corporation Tax of £8,550 on £45,000, dividends of £36,450, the first £7,570 covered by the unused Personal Allowance, £500 by the dividend allowance and the rest taxed at 10.75% (£3,051). Take-home is about £38,399, which is £463 less than the £12,570 salary route. A salary at the Personal Allowance level also protects your State Pension record. An accountant may still choose a different split for your situation.

What happens above £100,000?

Sole traders lose £1 of Personal Allowance for every £2 of income over £100,000, until it is gone at £125,140. That makes the effective tax rate on income in that band 60%, plus 2% Class 4 NI. At £110,000 of profit, the Personal Allowance falls to £7,570 and income tax rises to £33,432. A company lets you control how much income you take each year, which can keep you below £100,000. This is the point where a limited company most often makes sense for a successful trade business.

What matters besides tax?

Liability

As a sole trader, if the business owes money, you owe it personally. A company can protect your house and savings from business debts. But it does not stop a claim against you for your own negligent work, and lenders and suppliers often ask directors for personal guarantees. Good public liability and professional indemnity insurance matter more day to day than your structure.

Winning work

Some commercial clients, facilities firms and main contractors prefer or require a limited company. If you are chasing that work, ask them before you decide.

Admin and time

A company means payroll every month, annual accounts, a Corporation Tax return, a confirmation statement and keeping company and personal money separate. A sole trader has one Self Assessment return (and MTD quarterly updates if in scope). If you hate paperwork, that difference is real.

CIS cash flow

If you work under CIS, a company offsets deductions against its monthly payroll taxes, so less cash is tied up waiting for a refund. For a subcontractor with £6,000 a year of deductions, that can matter more than a few hundred pounds of tax.

What mistakes do tradespeople make?

• Using old rules of thumb. Employer NI at 15% above £5,000 and 2026/27 dividend tax rates of 10.75% and 35.75% change the maths compared with advice written a few years ago.
• Assuming the Employment Allowance applies. A one-director company where the director is the only employee above £5,000 cannot claim it.
• Treating company money as your own. Taking money out without paying it as salary or dividends creates a director's loan, with its own tax rules.
• Forgetting the extra costs. Accountancy fees and the confirmation statement eat into any saving.
• Going limited to avoid MTD. Companies have their own filing duties, and MTD for VAT still applies if registered.
• Not re-registering for CIS and VAT in the company's name.
• Thinking limited liability covers everything. Banks, landlords and suppliers often ask directors for personal guarantees, and it does not protect you from your own negligence claims.

What software do you need for each?

Sole traders need software that handles quotes, invoices and expenses, and from April 2027 most will need it to be MTD-compatible. Our Making Tax Digital guide for tradespeople explains who is in and when. Limited companies need full accounting software with payroll, Corporation Tax support and, if VAT registered, MTD VAT filing. Our accounting software for tradesmen comparison covers Xero, QuickBooks, Sage and FreeAgent, including which plans suit sole traders and which suit companies.