{"id":1821697,"date":"2026-09-25T15:42:33","date_gmt":"2026-09-25T13:42:33","guid":{"rendered":"https:\/\/lexpress-franchise.com\/en\/articles\/sole-trader-vs-limited-company\/"},"modified":"2026-09-25T15:25:17","modified_gmt":"2026-09-25T13:25:17","slug":"sole-trader-vs-limited-company","status":"publish","type":"post","link":"https:\/\/lexpress-franchise.com\/en\/articles\/sole-trader-vs-limited-company\/","title":{"rendered":"Sole trader or limited company: which to choose in the UK 2026"},"content":{"rendered":"\n

The rule of thumb that incorporating saves tax has been overtaken. The dividend allowance is now \u00a3500, dividend tax rates rose by two percentage points in April 2026, and employer National Insurance starts at \u00a35,000. Where the tipping point once sat near \u00a325,000 of profit, UK accountants now put it closer to \u00a350,000. For a franchisee, the agreement may settle the question first.<\/strong><\/p>\n\n\n\n

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Two structures cover almost every new UK business. A sole trader is the person; a limited company is a separate legal entity that the person owns and directs. Everything else follows from that distinction: who owes the tax, who owes the debts, what is on public record and how much administration the year carries. The figures below are for the 2026\/27 tax year and apply across the UK, with the note on Scottish income tax bands where it matters.<\/p>\n\n\n\n

What is the difference between a sole trader and a limited company?<\/h2>\n\n\n\n

A sole trader and their business are the same legal person, so the trader keeps the profit, pays income tax and National Insurance on all of it and is personally liable for every debt, while a limited company is a separate legal entity that owns its own assets, owes its own debts, pays corporation tax on its profits and files accounts at Companies House for anyone to read. That is the whole distinction, and each consequence below is a version of it.<\/p>\n\n\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t
Question<\/th>Sole trader<\/th>Limited company<\/th>\n<\/tr>\n<\/thead>\n
Who is liable for debts<\/td>The individual, without limit<\/td>The company, subject to guarantees given<\/td>\n<\/tr>\n
What tax is paid on profit<\/td>Income tax and Class 4 National Insurance<\/td>Corporation tax, then personal tax on what is drawn<\/td>\n<\/tr>\n
How money is taken out<\/td>Drawings. The profit is already the trader’s<\/td>Salary, dividends, or both<\/td>\n<\/tr>\n
What is published<\/td>Nothing<\/td>Accounts, directors and people with significant control<\/td>\n<\/tr>\n
Registration<\/td>Self Assessment with HMRC<\/td>Companies House, \u00a3100 online, plus HMRC<\/td>\n<\/tr>\n
Annual filing<\/td>Self Assessment return<\/td>Accounts, confirmation statement, corporation tax return<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n

How the tax works<\/h2>\n\n\n\n

A sole trader pays income tax on profit above the personal allowance of \u00a312,570<\/strong>, at 20%, 40% and 45% as the bands rise, plus Class 4 National Insurance at 6%<\/strong> on profit between \u00a312,570 and \u00a350,270 and 2%<\/strong> above that. Class 2 National Insurance was abolished from 6 April 2024. Scotland sets its own income tax bands, so a Scottish taxpayer’s figures differ while the National Insurance position does not.<\/p>\n\n\n\n

A company pays corporation tax at 19%<\/strong> on profits up to \u00a350,000 and 25%<\/strong> on profits above \u00a3250,000, with marginal relief tapering between the two. The detail that surprises people is that the effective rate on each extra pound inside that band is about 26.5%<\/strong>, higher than the main rate itself. Those thresholds are shared between associated companies, so running two companies halves each band.<\/p>\n\n\n\n

Money then has to come out. Salary is taxed through PAYE and attracts employer National Insurance at 15%<\/strong> above a secondary threshold of \u00a35,000, which the Employment Allowance may offset for eligible businesses. Dividends are paid from profit after corporation tax, with a dividend allowance of \u00a3500<\/strong> and rates that rose by two percentage points from 6 April 2026.<\/p>\n\n\n\n

That second layer is why the old arithmetic no longer holds. When the dividend allowance was \u00a35,000 and dividend rates were lower, the company route won early. With the allowance at \u00a3500 and rates up, the saving below about \u00a350,000 of profit is thin, and thinner still once a company’s accountancy and filing costs are counted.<\/p>\n\n\n\n

What Making Tax Digital changes<\/h2>\n\n\n\n

The other half of the comparison is administration, and it moved in April 2026. Making Tax Digital for Income Tax began on 6 April 2026<\/strong> for sole traders and landlords with qualifying income above \u00a350,000<\/strong>, who now keep digital records and send quarterly updates to HMRC rather than filing once a year. The threshold falls to \u00a330,000<\/strong> from April 2027.<\/p>\n\n\n

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Good to know<\/p>

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“Sole trader means less paperwork” is the oldest line in this comparison and it now needs qualifying. Above \u00a350,000<\/strong> of qualifying income a sole trader files quarterly under Making Tax Digital, while a limited company still files its accounts and corporation tax return once a year. The administrative gap between the two structures has narrowed at exactly the profit level where the tax comparison also gets close, which is why the decision is harder in 2026 than it was in 2023.<\/p>\n<\/div>\n<\/div><\/div>\n\n\n

The questions that actually decide it<\/h2>\n\n\n\n

Tax is one input. These are the others that change the answer:<\/p>\n\n\n\n