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It depends on your profit, how you pay yourself and the paperwork. In 2026-27, sole traders pay Income Tax and National Insurance on profit; companies pay 19% to 25% Corporation Tax, then you pay tax on what you draw.
There is no single right answer, and this page does not pick one for you. It sets out the 2026-27 rules for what to weigh up, using GOV.UK figures checked on 16 October 2026. GOV.UK notes that it is usually easier to move from sole trader to limited company than the other way round.
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The main differences
| Sole trader | Limited company | |
|---|---|---|
| Who owns the business | You are the business | The company is legally separate from you |
| Debts | You are personally liable for all of them | Owners are liable up to what they invested |
| Tax on profit | Income Tax and Class 4 National Insurance | Corporation Tax, paid by the company |
| Taking money out | All profit after tax is yours | Salary, dividends or a director's loan, each with rules |
| Filing | Self Assessment tax return | Accounts to Companies House and a Company Tax Return, plus payroll if you take a salary, and your own Self Assessment return if your dividends are over £10,000 |
| CIS deductions | Counted in your tax return | Taken off what the company owes through its payroll scheme |
| Making Tax Digital for Income Tax | Applies above the income thresholds | Does not apply to the company |
The 2026-27 rates
| Tax | Rate | Applies to |
|---|---|---|
| Income Tax (outside Scotland) | 20% / 40% / 45% | £12,571 to £50,270 / £50,271 to £125,140 / above |
| Class 4 National Insurance | 6% / 2% | Profits from £12,570 to £50,270 / above |
| Corporation Tax, small profits rate | 19% | Company profits of £50,000 or less |
| Corporation Tax, main rate | 25% | Company profits over £250,000, with Marginal Relief in between |
| Dividend allowance | 0% | The first £500 of dividends |
| Dividend tax | 10.75% / 35.75% / 39.35% | Basic / higher / additional rate band |
| Employer's National Insurance | 15% | A salary above £5,000 a year |
A worked comparison at £45,000 profit
A self-employed plasterer makes £45,000 profit in 2026-27. He lives outside Scotland, has no other income and has the full £12,570 personal allowance. The company version is deliberately simple: no salary, every penny of profit after Corporation Tax paid out as dividends, and no extra costs for running a company.
| Sole trader | Limited company | |
|---|---|---|
| Profit | £45,000.00 | £45,000.00 |
| Corporation Tax at 19% | £0.00 | £8,550.00 |
| Paid to you | £45,000.00 | £36,450.00 in dividends |
| Income Tax at 20% on £32,430 | £6,486.00 | £0.00 |
| Class 4 National Insurance at 6% on £32,430 | £1,945.80 | £0.00 |
| Dividend tax at 10.75% on £23,380 | £0.00 | £2,513.35 |
| Total tax | £8,431.80 | £11,063.35 |
| Left in your pocket | £36,568.20 | £33,936.65 |
How the company figures work. The company pays 19% on £45,000, leaving £36,450 to pay out. The first £12,570 of dividends is covered by the personal allowance and the next £500 by the dividend allowance. The remaining £23,380 is taxed at 10.75%.
On these assumptions, the company route costs £2,631.55 more. Change the assumptions and the answer changes. Paying a salary brings in payroll and employer's National Insurance, and company profits over £50,000 bring the higher Corporation Tax rates into play. An accountant can model your own figures.
CIS and Making Tax Digital
Both a sole trader and a company register for the Construction Industry Scheme (CIS), and contractors take 20% from both once registered, or 30% if not. A sole trader gets credit for those deductions on the Self Assessment return. A company sends an Employer Payment Summary with its payroll, and HMRC takes the CIS deductions off its PAYE bill. Deductions left over can be carried forward, but only within the same tax year; anything left after the tax year ends is claimed back as a refund.
Making Tax Digital for Income Tax (MTD) applies to sole traders and landlords. GOV.UK says dividends, including those from your own company, and PAYE pay do not count towards the qualifying income that decides whether you must join.
What this means for you
The company route adds duties. As a director you must keep company records, file accounts with Companies House within 9 months of your year end, pay Corporation Tax 9 months and 1 day after it, and file the Company Tax Return within 12 months. Each dividend needs a directors' meeting, minutes and a voucher, and changes of director must be reported to Companies House within 14 days. In return, the company's debts are its own, and your liability is limited to what you invested.
Being a sole trader keeps one return a year and fewer rules about taking money out, but you are personally liable for the business's debts, and above the thresholds you will be in MTD.
Steps to weigh it up
- Work out your expected profit for 2026-27, after costs.
- Run the sole trader figures using the rates table above.
- Get company figures for the way you would really pay yourself, including any salary.
- Add the cost and time of company accounts, payroll and Companies House filings.
- Think about liability: do you take on work where a claim or a bad debt could hit you personally?
- If you decide on a company, register it with Companies House before it starts trading.
Staying a sole trader? Use the free MTD check to see when Making Tax Digital starts for you, and the trades section for more guides for the building trades.
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Questions people ask
Is a limited company always cheaper for tax?
No. In the simplified £45,000 example on this page, with all profit paid out as dividends, the company route costs more tax in 2026-27. The answer changes with your profit, how you pay yourself and what you leave in the company.
What is the Corporation Tax rate for a small company?
19% on profits of £50,000 or less, and 25% on profits over £250,000. Between the two, the company may be entitled to Marginal Relief.
How are dividends taxed in 2026-27?
The first £500 is covered by the dividend allowance. Above that, 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.
Does Making Tax Digital for Income Tax apply to a limited company?
No. It applies to sole traders and landlords. Dividends, including those from your own company, and PAYE pay do not count towards the qualifying income that decides whether you join.
Can a limited company register for CIS?
Yes. A company is registered as a subcontractor, and its CIS deductions are taken off what it owes through its payroll scheme rather than through a Self Assessment return.
Sources
- Set up a business: compare sole trader and limited company (GOV.UK)
- Corporation Tax rates, expenses and reliefs (GOV.UK)
- Tax on dividends (GOV.UK)
- Income Tax rates and Personal Allowances (GOV.UK)
- Self-employed National Insurance rates (GOV.UK)
- Rates and thresholds for employers 2026 to 2027 (GOV.UK)
- Running a limited company: your responsibilities (GOV.UK)
- Accounts and tax returns for private limited companies (GOV.UK)
- What you must do as a CIS subcontractor (GOV.UK)
- Work out your qualifying income for Making Tax Digital for Income Tax (GOV.UK)
- Tax on dividends: how to report tax on dividends (GOV.UK)
This is general information to help you understand the rules. It isn't tailored to your circumstances, so check your own position before acting on it.
Righto Tax is a trading name of NJG Consultancy Ltd, registered in England and Wales, company number 16095900. Registered office: Jubilee House, East Beach, Lytham St Annes, FY8 5FT.
What happens next
- Use the free Making Tax Digital checker to see your own start date and deadlines.
- See what Righto Tax for Trades does for you, and join the waitlist.
- Questions about this page? Email hello@rightotax.co.uk.