TL;DR
The short answer
The arithmetic is more nuanced than most online calculators suggest. If you extract all profit each year, the limited company route only saves meaningful direct tax in a narrow band around £40,000–£70,000 of profit (and even there the saving is often less than the extra accountant fees). At higher profits the marginal corporation tax rate plus dividend tax actually makes sole trader cheaper for full extraction. The real case for incorporating is structural: leaving profit in the company, pension contributions, liability protection, professional credibility, or planning to sell or bring in partners. This guide walks through all of it.
But tax is only part of the picture. Limited liability protection, professional credibility, mortgage implications, and the loss of Business Asset Disposal Relief flexibility all matter — sometimes more than the tax. This guide covers all of it.
Almost every sole trader we work with at Fernside Accounting eventually asks the same question: should I go limited? It's one of the most important structural decisions you'll make in your business, and the answer is genuinely individual — not the one-size-fits-all advice you'll find in most online calculators.
This guide walks through what actually changes when you incorporate, the 2026/27 numbers in detail, the costs nobody mentions until you've already done it, and a decision framework you can apply to your own situation. It's written for sole traders, freelancers, contractors and landlords across Redbridge, Waltham Forest, Epping and the surrounding areas — though the principles apply nationwide.
What's actually different?
Run the numbers yourself
Strip away the jargon and there are four substantive differences between operating as a sole trader and operating through a limited company.
1. Legal status. As a sole trader, you and your business are legally the same entity. Business debts are your debts. Business contracts are your contracts. A limited company is a separate legal person — it can own things, owe things, sue and be sued, all in its own right. You own shares in it, but you and the company are distinct.
2. Tax structure. Sole traders pay income tax and Class 2/Class 4 NICs on their business profits, full stop, in the year they're earned. Limited companies pay corporation tax on their profits, and you then pay personal tax separately when you take money out (as salary or dividends). This two-layer system is where most of the tax planning happens.
3. Compliance burden. Sole traders file one self-assessment tax return a year (plus MTD ITSA quarterly updates from April 2026 if income is over £50,000 — see our MTD landlord guide). Limited companies file annual company accounts with Companies House, a corporation tax return with HMRC, a confirmation statement, payroll filings if there are employees or directors on payroll, and the director(s) still file personal self-assessment returns. It's meaningfully more.
4. Public visibility. Your sole trader business is essentially private — your name and trading address may appear on invoices, but your finances aren't on public record. A limited company files annual accounts that anyone can view at Companies House. Even abbreviated micro-entity accounts disclose total assets and capital, and your home address may be visible unless you use a separate registered office service.
Everything else — the marketing, the day-to-day operations, the client work — stays much the same. Most of the differences are about structure, not about how you actually do business.
The 2026/27 tax comparison
Let's lay out the 2026/27 numbers side by side. These are the figures that matter for the decision.
Sole trader rates (2026/27)
| Income band | Income tax | Class 4 NIC | Total marginal rate |
|---|---|---|---|
| £0 – £12,570 (personal allowance) | 0% | 0% | 0% |
| £12,571 – £50,270 (basic rate) | 20% | 6% | 26% |
| £50,271 – £125,140 (higher rate) | 40% | 2% | 42% |
| Above £125,140 (additional rate) | 45% | 2% | 47% |
Limited company rates (2026/27)
This is where it gets more complex. A limited company pays corporation tax on its profits, then you pay personal tax on whatever you take out. Most director-shareholders take a small salary plus dividends.
| What's being taxed | Rate | Notes |
|---|---|---|
| Corporation tax (profits ≤ £50,000) | 19% | Small profits rate |
| Corporation tax (£50,001 – £250,000) | 19–25% | Marginal relief (effective ~26.5% on the marginal slice) |
| Corporation tax (above £250,000) | 25% | Main rate |
| Dividends — basic rate band | 8.75% | After £500 dividend allowance |
| Dividends — higher rate band | 33.75% | — |
| Dividends — additional rate band | 39.35% | Above £125,140 total income |
| Employer NIC (on director salary above £5,000) | 15% | Up from 13.8% in 2024/25 |
| Employee NIC (on director salary) | 8% | Above £12,570 |
The headline insight: a sole trader pays roughly 26% on basic-rate profits, while a limited company director taking salary plus dividends pays 19% corporation tax then 8.75% on the dividend portion — but only on the amount actually extracted, and after the salary deduction reduces taxable profit. The maths gets interesting fast.
Worked examples at £30k / £60k / £100k
Theory is one thing; numbers are clearer. Here's the actual tax position at three common profit levels, assuming all profit is extracted to the individual either as sole-trader profit or as salary plus dividends.
Example 1: £30,000 profit
| Sole trader | Ltd co (salary + dividends) | |
|---|---|---|
| Profit / company gross income | £30,000 | £30,000 |
| Director salary (£12,570) | — | £12,570 |
| Employer NIC on salary | — | £1,136 |
| Taxable company profit | — | £16,294 |
| Corporation tax (19%) | — | £3,096 |
| Available as dividends | — | £13,199 |
| Personal income tax (on dividends at 10.75%) | £4,532 | £1,365 |
| Total tax | £4,532 | £5,597 |
| Net take-home | £25,468 | £24,403 |
| Saving from incorporating | ~£1,065 lost per year | |
Verdict at £30k: Incorporating loses you money even before running costs are factored in. Stay as a sole trader unless there's a non-tax reason (liability, credibility, client requirement).
Example 2: £60,000 profit
| Sole trader | Ltd co (salary + dividends) | |
|---|---|---|
| Profit / company gross income | £60,000 | £60,000 |
| Director salary (£12,570) | — | £12,570 |
| Employer NIC on salary | — | £1,136 |
| Taxable company profit | — | £46,294 |
| Corporation tax (19%) | — | £8,796 |
| Available as dividends | — | £37,499 |
| Personal income tax (dividends at 10.75%/35.75%) | £13,889 | £3,977 |
| Total tax | £13,889 | £13,909 |
| Net take-home | £46,111 | £46,091 |
| Saving from incorporating | ~£20 difference (essentially break-even) | |
Verdict at £60k: The direct tax saving (~£900) barely covers the additional accountant fees. At this level incorporating only really pays off if you can retain some profit in the company (avoiding the dividend tax layer), if profit is growing fast, or if a non-tax driver matters — credibility, liability protection, mortgage planning.
Example 3: £100,000 profit
| Sole trader | Ltd co (salary + dividends) | |
|---|---|---|
| Profit / company gross income | £100,000 | £100,000 |
| Director salary (£12,570) | — | £12,570 |
| Employer NIC on salary | — | £1,136 |
| Taxable company profit | — | £86,294 |
| Corporation tax (~22% with marginal relief) | — | £19,118 |
| Available as dividends | — | £67,176 |
| Personal income tax (dividends at 35.75%) | £30,689 | £14,537 |
| Total tax | £30,689 | £34,790 |
| Net take-home | £69,311 | £65,210 |
| Saving from incorporating | ~£4,102 lost per year (if extracting everything) | |
Verdict at £100k: Counter-intuitively, if you extract every penny each year, the limited company route is actually more expensive at this profit level — by around £2,500. The case for incorporating here is the flexibility: leaving profits in the company (delaying personal tax until extraction), timing dividends across tax years, funding pension contributions through the company (substantial extra savings), employing a spouse on dividends. A good accountant should be saving you thousands a year here through structural planning, not just compliance. If you really do need every penny of profit personally, sole trader is fine.
Important caveat
These figures assume the standard director-shareholder structure of small salary + dividends, all profit extracted, no pension contributions, no spouse on payroll, no other personal income, and English/Welsh/NI tax rates (Scotland differs). Your actual numbers will vary. Use these as a guide to the shape of the decision — for a personalised calculation, talk to us or your accountant.
The hidden costs of going limited
Most online "should I incorporate?" calculators only show you the tax saving and stop there. The reality is that running a limited company comes with several costs that don't get mentioned until you're already in it. Here are the ones that actually matter.
The obvious ones
Higher accountant fees. At Fernside, our sole-trader package starts at £45/month; our limited company package starts at £125/month. That's £960/year extra. Other firms charge more. Even DIY-friendly platforms like FreeAgent or Crunch will run you £40–80/month for the company-suitable version. Build this into your saving calculation.
Confirmation statement. £34/year filed with Companies House. Small, but mandatory.
Business bank account. Limited companies need a business bank account — sole traders technically don't (though it's good practice). Free options exist (Starling, Tide) but most traditional banks charge £5–15/month.
Payroll software. If you're paying yourself a director salary, you need RTI-compliant payroll software. Often bundled with cloud accounting; otherwise £10–25/month standalone.
The less obvious ones
Loss of Business Asset Disposal Relief (BADR) flexibility. Sole traders selling their business pay just 14% CGT on qualifying gains in 2026/27 (BADR rate, up from 10%). Limited companies don't get this directly — the company itself would pay corporation tax on a sale of assets, then you'd pay tax again extracting the proceeds. BADR on the sale of company shares is still available if the conditions are met, but the planning is more involved. If you might sell your business one day, factor this in.
More complex tax planning. A sole trader's tax position is straightforward: profit comes in, tax goes out. A limited company creates choices — how much salary, how much dividend, when to pay dividends, whether to retain profit, whether to fund a pension through the company, whether to bring a spouse onto the share register. Each choice has tax consequences. This complexity is mostly an opportunity (more levers to pull) but it does mean more thinking and more accountant time.
Mortgage friction. Sole traders with two to three years of accounts can usually get a mortgage based on average profit. Limited company directors often struggle in the first two years post-incorporation because lenders want to see established company accounts. If you're planning to apply for a mortgage in the next 12–18 months, talk to a mortgage broker before incorporating.
Public accounts. Even abbreviated micro-entity accounts at Companies House disclose total assets, capital, and the names of directors. Your competitors can see them. Some find this uncomfortable.
The "what if I want to change back" problem. Disincorporating — winding up a limited company and going back to sole trader — is genuinely painful. It involves either an MVL (Members' Voluntary Liquidation, ~£2,000+ in fees) or a strike-off with distribution under £25,000 to qualify for capital treatment. Most people don't fully appreciate this until they want to do it.
Non-tax reasons to incorporate (or not)
Tax dominates the conversation, but for plenty of our clients the deciding factor is something else entirely. Here are the non-tax reasons that genuinely matter.
Good reasons to incorporate
- Genuine personal liability risk (construction, professional advice, products that could harm)
- Clients (especially corporates) require a limited company supplier
- Professional credibility matters in your market (B2B services, agencies, tech)
- You want to bring in business partners or investors
- You want to build something with the option to eventually sell
- You want to keep your personal name off invoices and contracts
- You want to ringfence different business activities in separate entities
Bad reasons to incorporate
- "My friend says I should" without doing the maths
- For "the tax saving" at <£30k profit
- To get around IR35 (it doesn't work that way)
- To hide income from a spouse, ex-partner or HMRC
- You're planning to apply for a mortgage soon
- You're genuinely planning to wind down in the next 2 years
- You don't have the time or inclination for more admin
A special note for landlords
The incorporation conversation for landlords is genuinely different from the conversation for trading businesses, mainly because of Section 24 — the rule restricting mortgage interest relief for individual residential landlords to a 20% basic-rate tax credit.
If you're a higher-rate-tax landlord with significant mortgage interest, the maths can be dramatic. A landlord earning £40,000 of gross rent with £25,000 of mortgage interest pays tax on the full £40,000 less only a 20% credit on the interest — meaning the higher-rate band gets eaten through despite the borrower paying out the interest in cash. Inside a limited company, the same £25,000 of interest is fully deductible as a business expense. The tax difference can be thousands per year.
But — and it's a big but — incorporating an existing portfolio triggers two large costs: Stamp Duty Land Tax (the company is buying the properties from you, at market value, with the SDLT 3% surcharge on additional properties on top) and Capital Gains Tax (you're treated as disposing of the properties personally). For a meaningful portfolio, these costs can run into tens of thousands.
There are reliefs and structuring options — incorporation relief under TCGA 1992 s.162 can defer CGT if specific conditions are met, and some restructuring strategies use beneficial interest transfers via deed of trust rather than full legal transfers. None of this is something to attempt without specialist advice. For complex landlord incorporation work, we typically escalate to our sister firm The Tax Lead.
For new landlord investments — properties you haven't bought yet — going limited from day one avoids the SDLT/CGT problem entirely. That's worth thinking about if you're building a portfolio.
Either way, if you're a landlord weighing this up, also read our MTD for Income Tax 2026 landlord guide — the compliance burden change adds another factor to the calculation.
A clear decision framework
If you've read this far and are still trying to decide, here's how we'd actually walk through it on a call with you.
Step 1: What's your annual profit going to be next year?
- Under £40,000 — usually stay sole trader unless there's a non-tax driver
- £40,000–£70,000 — borderline if extracting everything; worth doing if you can retain some profit or have non-tax drivers
- £70,000–£100,000 — strong case if you can use the structural flexibility (retained profit, pensions, spouse dividends). If extracting every penny, sole trader is comparable
- Over £100,000 — structural case wins (pension funding, retained profit, multiple shareholders); avoid if extracting fully each year and have no other levers to pull
Step 2: Do you need limited liability protection? If yes, that often pushes the decision regardless of profit level.
Step 3: Are you applying for a mortgage in the next 18 months? If yes, talk to a mortgage broker before incorporating.
Step 4: Do you have plans to sell the business? If yes — even in 5+ years — factor in BADR planning. The decision affects which structure is more tax-efficient at exit.
Step 5: Is your profit growing fast or shrinking? Incorporating into a stable or growing business makes sense; doing it in a business you might wind up in 18 months is expensive and pointless.
Step 6: Can you handle the extra admin? Or, if you're using an accountant, are you willing to pay the additional fees? Be honest with yourself.
Add the answers together and you usually have a clear direction. Where it stays genuinely close, time the decision around when it's easiest to switch — typically the start of a new tax year (6 April) or your natural year-end.
How the actual switch works
If you've decided to incorporate, here's the broad sequence. We've written a more detailed walk-through at how to form a limited company, but here's the headline.
- Plan the timing. Most people switch at the start of a new tax year or at their natural year-end to simplify cessation accounts.
- Choose a company name and check availability at Companies House.
- Incorporate the company — directly via Companies House (£50) or through a formation agent (£12–50, often with extras bundled). Decide on share structure now (single share for sole director? Alphabet shares for spouse? Multiple share classes for flexibility?).
- Set up business banking for the company. Open the account before you start trading through it.
- Register for HMRC — corporation tax registration happens automatically with Companies House. Register for PAYE if you're going on payroll, and VAT if applicable.
- Cease the sole trader business. File the final self-assessment as a sole trader, notify HMRC of cessation, prepare cessation accounts.
- Transfer business assets to the company (often at market value, sometimes via incorporation relief). Get this advised before doing it.
- Notify clients with new invoicing details — your VAT number, registered office, company number — and update contracts, websites, social media.
- Start running through the new structure. The first three months will feel like more admin; after that it settles.
The whole process can be done in a couple of weeks if it's planned. If it's done badly — wrong share structure, no asset transfer agreement, no proper cessation — it can take years to unpick.
Sources & further reading
The figures and rules in this guide are based on the following HMRC and Companies House publications. Always check the latest version on gov.uk before acting:
- Self-employed National Insurance rates (gov.uk)
- Income Tax rates and Personal Allowances (gov.uk)
- Tax on dividends (gov.uk)
- Corporation Tax rates and allowances (gov.uk)
- Set up a limited company (gov.uk)
This guide was last reviewed in May 2026 and reflects the 2026/27 tax year. Tax rates and thresholds may change at subsequent Budgets.
Common questions
At what profit level does incorporating start to save tax?
If you extract all profit each year, the direct tax saving is genuinely small — often around £900 at £60k profit and actually negative below £40k or above £80k (where higher dividend rates and corporation tax marginal relief erase the gain). The real advantage of incorporating at any profit level is structural — being able to retain profit in the company, defer extraction across tax years, fund pension contributions, and add shareholders. Without those structural levers, tax alone rarely justifies the switch.
What are the hidden costs of running a limited company?
Beyond the obvious accountant fee (typically £125–£200/month versus £45 for a sole trader), hidden costs include: business banking fees, confirmation statement (£34/year), payroll software, the time cost of more compliance, and most importantly the loss of Business Asset Disposal Relief flexibility on eventual sale or wind-up.
Can I take all the company profit as salary instead of dividends?
Technically yes, but it's almost always more expensive than salary-plus-dividends. Paying yourself a £60,000 salary attracts roughly £6,800 of employee NICs and £8,000 of employer NICs, whereas the same amount taken as £12,570 salary plus £47,430 dividends attracts no NICs and lower dividend tax.
Should I incorporate just for limited liability protection?
If your work carries genuine personal liability risk (construction, professional advice, products that could cause harm), limited liability is a real benefit. For many freelancers and consultants the risk is theoretical — professional indemnity insurance and well-drafted client contracts often provide the protection you actually need at lower cost.
How does the £90,000 VAT threshold interact with this?
VAT is based on turnover; incorporation on profit — they're separate decisions. But the two often arrive together because both signal a business growing past start-up scale. If you're approaching both thresholds simultaneously, factor VAT registration into the bigger restructure rather than treating them as unrelated events.
Can I incorporate part-way through a tax year?
Yes — limited companies can be incorporated on any day. Most accountants recommend timing it to coincide with the start of a tax year (6 April) or your natural year-end, to simplify the cessation accounts and avoid splitting the year. There's no tax penalty for incorporating mid-year, just a bit more admin.
Will incorporating affect my mortgage application?
Often yes, especially in the first two years post-incorporation. Lenders typically want to see two to three years of company accounts before treating limited company directors the same as established sole traders. If you're planning to apply in the next 12–18 months, talk to a mortgage broker first.
What about Section 24 — does it apply to companies?
No. Section 24 restricts mortgage interest relief for individual landlords to a 20% basic-rate credit only. Limited companies holding buy-to-let property deduct mortgage interest in full. This is why many higher-rate landlords are incorporating — though SDLT and CGT on the transfer can be substantial, so the decision needs careful modelling.