When should a UK freelancer switch from sole trader to limited company?
There is no single profit level above which a limited company is automatically cheaper. On 2026/27 rates (dividends 10.75% / 35.75% / 39.35%, employer NI 15% above £5,000), if you draw all profit out each year, a sole trader keeps about the same or more at every profit level we modelled from £20,000 to £200,000 — before the extra Ltd accountancy fee. A limited company's tax advantage now comes mainly from retaining profit in the company or making employer pension contributions.
Key takeaways
- All profit drawn each year: sole trader keeps the same or more at every level we modelled (closest at around £60,000, where the two are within about £20 before fees)
- Ltd accountancy (typically £800–£1,800/year) widens the gap in the sole trader's favour
- Retaining profit in the company defers dividend tax — it does not remove it; tax is due when the profit is later paid out
- Employer pension contributions, limited liability, client requirements and a planned sale are the usual reasons to incorporate
- Run your own numbers below — the result depends on salary, fees and how much you draw
Editorial: Calculator maintained by the FreelanceToolkit UK editorial team using HMRC 2026/27 rates. Figures come from the same calculation engine as our limited company take-home calculator and are covered by automated regression tests. Editorial policy · Sources & methodology · How we test tools.
In this guide
This calculator answers one specific question: at your current profit level, would you take home more as a sole trader or as a director of a limited company? The maths matters — but so do the non-tax factors (admin load, filing deadlines, credibility with clients, mortgage applications). The calculator handles the numbers; the guidance below handles the rest. UK 2026/27 rates apply throughout.
Worked example
Ollie makes £68,000 of net profit consulting. As a sole trader he pays income tax of £14,632 and Class 4 NI of £2,617 — total £17,249, take-home £50,751. As a limited-company director on a £12,570 salary, drawing all remaining profit as dividends and paying a £1,200 accountancy fee, the company pays £1,136 employer NI and £10,320 corporation tax, and Ollie pays £5,813 dividend tax — take-home £49,531. On these assumptions the sole-trader route leaves him about £1,220 better off, and he avoids annual accounts, a Corporation Tax return, a confirmation statement and payroll. A limited company only comes out ahead for Ollie if he leaves profit in the company (deferring dividend tax) or uses employer pension contributions.
At-a-glance comparison
| Factor | Sole trader | Limited company |
|---|---|---|
| Setup cost | £0 (register with HMRC) | ~£50 (Companies House) |
| Filings per year | 1 (Self Assessment) | 3-4 (Accounts, CT600, CS01, SA) |
| Tax + NI on £50,270 profit (all profit drawn) | ~£9,802 | ~£10,880 plus accountancy fee (£12,570 salary + dividends) |
| Tax + NI on £75,000 profit (all profit drawn) | ~£20,189 | ~£20,963 plus accountancy fee (£12,570 salary + dividends) |
| Legal separation of business + personal | No | Yes |
| Perceived by larger clients as | Individual | Business (sometimes required) |
| Typical accountant fee/year | £200-£600 | £800-£1,800 |
| Mortgage application difficulty | Usually easier (2-3 yrs SA302s) | Sometimes harder (dividends complicate) |
Decision tree
Answer these questions in order — the first 'yes' with a clear steer usually gives you the answer.
- Will you draw out all the profit every year?
On 2026/27 rates a sole trader usually keeps the same or more at any profit level once Ltd accountancy fees are included. Check your numbers in the calculator. - Can you leave a meaningful amount of profit in the company?
Retained profit is taxed at 19%–26.5% corporation tax now, with dividend tax deferred until it is paid out. This is where a limited company can come out ahead. - Do you want to make large pension contributions?
Employer pension contributions from a company avoid NI and reduce corporation tax; this can favour a limited company. - Is your profit above £100,000?
The personal allowance taper applies whichever structure you use. Retained profit and pension planning matter more than the structure itself. - Do larger clients require a limited company?
If yes, structure follows contract regardless of tax maths. - Are you planning to sell the business or bring in co-owners?
Limited company — shares create the legal container.
Sources & official references
Every rate and threshold in this guide traces back to a published UK official source. All updated for the 2026/27 tax year.
Related on FreelanceToolkit UK
Your numbers
Verdict
Side-by-side
| Sole trader | Limited company |
|---|
How this comparison works
Sole trader side
Pure pass-through. Your business profit is your personal income — taxed at standard UK income tax bands plus Class 4 NI (6% from £12,570 to £50,270, then 2% above). Class 2 NI is voluntary above the Small Profits Threshold from 2024/25 onwards.
Limited company side
- Company profit minus director's salary, employer NI on that salary (15% above £5,000) and the accountant fee = taxable company profit.
- Corporation tax applies: 19% on profits up to £50k, marginal 26.5% rate £50k–£250k, 25% above £250k.
- What's left after corp tax is available as dividends.
- Director takes all dividends personally; personal tax: salary uses personal allowance, dividends use £500 dividend allowance, then 10.75% basic / 35.75% higher / 39.35% additional rate (2026/27). The £500 allowance still uses up band space, and dividends are taxed on top of salary.
- Director's salary attracts income tax + employee NI; we assume director's salary set at the £12,570 personal-allowance level so income tax is zero and employee NI is minimal at that point.
What this comparison doesn't include
Pension contributions, dividend tax planning across multiple years, student loan repayments, scottish tax bands, mortgage-borrowing impact, IR35 considerations, holiday pay equivalence, sick-pay value. For the broader trade-off picture, see our definitive sole trader vs Ltd guide.
Worked examples
All examples: 2026/27 rates, England/Wales/NI, £12,570 director's salary, £1,200 Ltd accountancy fee, all company profit paid as dividends unless stated.
Sole trader: income tax £5,486 + Class 4 NI £1,646 = £7,132. Take-home £32,868.
Ltd: employer NI £1,136, corporation tax £4,768, dividends £20,327 with dividend tax £2,131. Take-home £30,765 after the £1,200 fee.
Sole trader: tax + NI £15,989, take-home £49,011.
Ltd: taxable company profit £50,095 (after salary, £1,136 employer NI and the fee), corporation tax £9,525 (marginal relief applies just above £50,000), dividends £40,569 with dividend tax £5,025. Take-home £48,115.
Before the accountancy fee the two routes are within about £330 of each other at this level — the structure decision should rest on retained profit, pensions and non-tax factors.
Sole trader: tax + NI £30,689, take-home £69,311.
Ltd, all profit drawn: corporation tax £18,800, dividends £66,294 with dividend tax £14,222. Take-home £64,643 — about £4,670 less than the sole trader.
Ltd, dividends only up to the basic-rate limit: take-home £46,271 this year with £28,594 left in the company. Tax paid this year is £23,935 against £30,689, but dividend tax will be due when the retained £28,594 is paid out later, so this is a deferral, not a saving.
No — it covers the headline tax difference. It doesn't model pension contributions (which favour Ltd at higher levels), student loans, Scottish tax bands, IR35, mortgage borrowing impact (often opposite of tax conclusion — Ltd standard route under-borrows), or qualitative factors like admin overhead and liability protection. See our definitive guide for the full trade-off picture.
On 2026/27 rates there is no general break-even if you draw out all your profit: in our model a sole trader keeps about the same or more at every profit level from £20,000 to £200,000, even before Ltd accountancy fees (the two are closest at around £60,000). A limited company can come out ahead if you retain profit in the company, make employer pension contributions, or have other income or circumstances the calculator does not model. Use the calculator with your own salary, fee and drawing assumptions, and check with an accountant before changing structure.
£12,570 is a common choice: it uses the personal allowance with no income tax or employee NI and earns a State Pension qualifying year. Since April 2025 the company pays 15% employer NI on salary above £5,000 (£1,136 on £12,570) unless it can claim the Employment Allowance, which single-director companies usually cannot. The salary and employer NI both reduce corporation tax, so a £12,570 salary still typically works out slightly cheaper overall than a lower one, but the margin is small — your accountant can confirm for your company.
No — you can retain profit in the company. Retained profit isn't taxed again personally, but it sits inside the Ltd. Useful for smoothing future income, funding the business, or planning a future dividend draw. The calculator assumes you take all available profit as dividends in the same year.
If you're inside IR35 (the engagement is "deemed employment"), the Ltd advantage largely disappears — the engaging client deducts PAYE/NI as if you were employed. Outside IR35, normal Ltd rules apply. See our IR35 status checker.
Depends which lender. Standard high-street mortgage lenders use salary + dividends drawn — typically under-borrows tax-efficient Ltd directors. Specialist lenders use share of company profit including retained — often over 2× more borrowing. See our sole trader vs Ltd mortgage comparison.
£80–£150/month is normal for a single-director freelance Ltd with simple operations. Pure sole traders DIYing tax can run at £0 accountant fees but typically pay £150–500/year for a Self Assessment service. The calculator excludes sole trader accountant fees (most don't use one) but includes Ltd ones because they're effectively required.
VAT applies separately and equally to both structures above the £90k turnover threshold. It doesn't change the sole-trader-vs-Ltd outcome materially — the comparison is downstream of VAT. See our VAT registration threshold guide.
Estimating tool only. Uses simplified UK 2026/27 rates — actual tax depends on full personal circumstances (other income, pension, student loan, region). Not regulated tax advice. For decisions involving structural change, consult a qualified accountant.