Probably not, on tax alone. At 2026/27 rates a one-person limited company that pays out all its profit no longer beats a sole trader at any normal profit level. The two run roughly level around £60,000 of profit.
That is a genuine change, and a lot of advice still has not caught up with it. Two rule changes did the damage, and neither is being reversed. Below is the arithmetic, then the reasons incorporating can still be the right decision.
What changed
On 6 April 2025 employer National Insurance rose from 13.8% to 15%, and the secondary threshold — the point at which a company starts paying it on a salary — fell from £9,100 to £5,000 a year. A director's salary now attracts employer NI almost immediately.
On 6 April 2026 the dividend ordinary and upper rates each rose by two percentage points, to 10.75% and 35.75%. The additional rate stayed at 39.35% and the dividend allowance stayed at £500.
The third piece is the one people miss. A company whose only employee is a single director paid above the secondary threshold generally cannot claim the £10,500 Employment Allowance, so there is nothing to absorb that employer NI bill.
Worked example: £40,000 of profit
Same business, same £40,000 of profit before the owner takes anything out. England, Wales or Northern Ireland rates, no other income, no pension contributions.
As a sole trader:
- Income tax: £40,000 less the £12,570 personal allowance leaves £27,430 taxable, all at 20% = £5,486
- Class 4 NI: £27,430 at 6% = £1,645.80. Class 2 is £0 — the compulsory charge was abolished in April 2024
- Total tax and NI £7,131.80, leaving £32,868
Through a limited company, taking a £12,570 salary and the rest as dividends:
- Employer NI: £12,570 less the £5,000 threshold = £7,570 at 15% = £1,135.50
- Profit left after salary and employer NI: £40,000 − £12,570 − £1,135.50 = £26,294.50
- Corporation tax at the 19% small profits rate: £4,995.96
- Distributable profit: £21,298.55
- Dividend tax: the first £500 is free, the remaining £20,798.55 at 10.75% = £2,235.84
- Total tax and NI £8,367.30, leaving £31,633
The sole trader is £1,235 a year better off before a penny of extra accountancy fees. Add the £600 to £1,500 a year a company costs over a sole trader return and the real gap is nearer £1,850 to £2,750. At this profit level, incorporating for tax reasons alone loses you money.
Worked example: £80,000 of profit
Doubling the profit does not rescue the case. It makes it worse.
As a sole trader:
- Income tax: £37,700 at 20% = £7,540, then £29,730 at 40% = £11,892, so £19,432
- Class 4 NI: £37,700 at 6% = £2,262, then £29,730 at 2% = £594.60, so £2,856.60
- Total tax and NI £22,288.60, leaving £57,711
Through a limited company, again £12,570 salary and the rest as dividends:
- Employer NI: £1,135.50
- Profit after salary and employer NI: £66,294.50, which is above the £50,000 lower limit, so marginal relief applies
- Corporation tax: 25% of £66,294.50 = £16,573.63, less marginal relief of 3/200 × (£250,000 − £66,294.50) = £2,755.58, giving £13,818.04, an effective 20.8%
- Distributable profit: £52,476.46
- Dividend tax: £500 free, then £37,200 at 10.75% = £3,999, then £14,776.46 at 35.75% = £5,282.58, so £9,281.58
- Total tax and NI £24,235.12, leaving £55,765
The sole trader wins by £1,946, again before extra fees. The culprit is the upper dividend rate. Once your total income clears £50,270, each further pound of dividend costs 35.75% on top of the corporation tax the company has already paid, which works out at roughly 49p in the pound.
So is there a crossover point at all?
Barely. Run the same comparison across a range of profits and the company is behind almost everywhere. These are annual differences in take-home, limited company minus sole trader, before any extra accountancy cost:
- £30,000 profit: −£1,065
- £40,000 profit: −£1,236
- £50,000 profit: −£1,406
- £60,000 profit: −£20
- £70,000 profit: −£869
- £80,000 profit: −£1,947
- £100,000 profit: −£4,102
There is exactly one window where the company edges ahead: roughly £60,150 to £60,500 of profit, and the win is about £12 a year. That is the entire 2026/27 tax advantage for a one-person company that draws everything out. It is a rounding error, not a strategy.
The dip around £60,000 is not magic. That is the point where the sole trader has just crossed into 40% income tax while the company's remaining profit still sits under the £50,000 corporation tax limit and the dividends still sit inside the basic-rate band. Go past it and the 35.75% upper dividend rate takes over.
Where a company can still win on tax
Every figure above assumes you take all the profit out each year. Change that assumption and the comparison changes with it.
Retaining profit. A sole trader is taxed on the full profit whether they spend it or not. A company is not. In the £80,000 example, drawing only up to the £50,270 basic-rate ceiling and leaving £14,776 in the company, then taking it in a leaner year at the basic rate, gets you to roughly £59,459 against the sole trader's £57,711. Income smoothing, rather than the headline rates, is now the main tax argument for incorporating.
A spouse or partner who genuinely owns shares. Split that same £80,000 company 50/50 with a spouse who has no other income and household dividend tax falls from £9,282 to about £4,182, leaving roughly £60,864 — around £3,150 ahead of the sole trader. The shares must carry real rights and your spouse must be a real shareholder. HMRC challenges arrangements that only exist on paper.
Employing anyone else. Take on one more employee and the company can usually claim the £10,500 Employment Allowance, which wipes out the employer NI on the director's salary entirely.
Pension contributions. Employer contributions are deductible for corporation tax and are not capped by relevant earnings, which matters if you want to put in more than you pay yourself. On like-for-like amounts, though, a sole trader gets relief too. At £80,000 of profit and a £20,000 contribution, the company comes out only about £380 ahead.
The reasons that have nothing to do with tax
These have not changed, and they are now doing most of the work in this decision.
- Limited liability. The company is a separate legal person, so if it fails or is sued, your house and savings are generally out of reach. The protection has holes: lenders routinely ask directors for personal guarantees, and directors stay personally liable for wrongful trading and some unpaid PAYE and NI.
- Client and agency requirements. Many main contractors, recruitment agencies and public sector bodies will only engage a limited company. If that is your market, the decision has been made for you.
- IR35. A company does not defeat IR35. If your engagements fall inside the rules you lose almost all of the difference anyway, and an umbrella arrangement may be simpler — our IR35 guide walks through the status tests.
- Raising investment. You cannot sell a slice of a sole trader business. A company can issue shares, and investors may qualify for SEIS or EIS relief.
- Protecting a trading name. Incorporating stops anyone else registering the same company name. It is not a trade mark, but it helps.
- Selling up later. A company with contracts, staff and accounts is a far cleaner thing to sell than a sole trader's book of work.
What incorporating actually costs
- Companies House incorporation: £50 online. The fee rose from £12 on 1 May 2024, so ignore any guide still quoting the old figure.
- Confirmation statement: £34 a year, filed online.
- Accountancy: £800 to £2,500 a year for accounts, a CT600 and payroll, against £200 to £500 for a straightforward sole trader return.
- Registered office service: £50 to £200 a year, if you would rather your home address stayed off the public register.
- Admin: annual accounts within 9 months of your year end, corporation tax paid within 9 months and a day, a CT600 within 12 months, monthly RTI payroll submissions and statutory registers. Late filing triggers automatic penalties.
- Publicity: your accounts, registered office, and your name and month of birth all sit on the public register. Some people mind that. Some clients like it.
How to decide
Sole traders still outnumber companies comfortably. The Department for Business and Trade's Business Population Estimates 2025 counted 3.2 million sole proprietorships against 2.1 million actively trading companies at the start of 2025. For a lot of those people, staying unincorporated is a considered choice rather than an oversight.
A workable test for 2026/27: incorporate if you need liability protection, if your clients insist on it, if you want to bring in investment, or if you can genuinely leave profit in the business. If none of those apply and you draw everything you earn, staying a sole trader is very likely cheaper and definitely simpler.
If you do decide to go ahead, our guide to setting up a limited company covers the practical steps.
Run your own figures before you commit. Use our limited company calculator to compare both structures on your actual profit, salary and dividend split at 2026/27 rates.
This article is general information for the 2026/27 UK tax year, not personalised tax advice, and figures may change; parts were drafted with AI assistance and reviewed for accuracy. Check GOV.UK or a qualified accountant before incorporating.