Sole trader or limited company in 2026/27: an honest comparison

"Should I go limited?" is probably the question accountants hear most, and the honest answer has two parts. First: it depends — genuinely, on your numbers and your circumstances, not as a dodge. Second: the tax difference is smaller than pub wisdom claims, and it has narrowed over the past decade. Anyone promising you a precise saving from incorporation without seeing your figures is selling something.

Here is the comparison that actually matters, in plain terms.

The two structures in one paragraph each

A sole trader is the business. You register for Self Assessment, keep records, and pay Income Tax and National Insurance on your profits. There is no legal separation between you and the business: its debts are your debts, its income is your income.

A limited company is a separate legal person, registered at Companies House. You typically wear two hats — director (running it) and shareholder (owning it). The company earns the money, pays Corporation Tax on its profits, and you are taxed personally only on what you take out, usually as salary, dividends or a mix.

Administration: the real gap

Sole trading is administratively light: keep good records, file a Self Assessment return, pay twice a year. From April 2026, sole traders with gross income over £50,000 also join Making Tax Digital for Income Tax — digital records and quarterly updates (over £30,000 from April 2027).

A company carries genuine obligations: annual accounts filed at Companies House (and publicly visible), a confirmation statement, a Corporation Tax return, payroll filings if you pay yourself a salary, dividend paperwork done properly, and directors' legal duties that persist even when the company is quiet. None of this is hard with support, but it is real, it recurs, and it costs either your evenings or your money. Interestingly, companies are currently outside MTD for Income Tax — that regime is for individuals.

Liability: the strongest argument for a company

If a sole trader's business fails or is sued, personal assets are on the line. A company's liability is, as the name says, limited — normally to what you have put in. Two honest caveats: banks and landlords routinely ask small-company directors for personal guarantees, which hand back some of that protection; and no structure excuses you from professional negligence, so insurance matters either way. But for businesses with meaningful risk — premises, employees, products that can go wrong, large contracts — limited liability is a serious, sometimes decisive, benefit.

Tax dynamics, without invented numbers

A sole trader pays Income Tax and Class 4 National Insurance on all profits in the year they arise — whether or not the money is spent, saved or reinvested.

A company pays Corporation Tax on its profits; you then pay personal tax on what you extract. Salary goes through PAYE with National Insurance (including employer's); dividends carry their own tax rates and a small tax-free allowance. All of these rates and thresholds move around — check the current figures on GOV.UK rather than trusting any article's snapshot, including this one.

Two structural truths survive every Budget:

1. The gap has narrowed. Dividend taxation has risen and allowances have shrunk over the years, so the headline "companies pay less" is far less true than it once was, especially at modest profits where the costs of running a company can eat the difference.
2. Retention is where companies genuinely shine. If you draw everything you earn, the two structures often land closer than expected. If you can leave profits in the business — to reinvest, to smooth lumpy years, to fund equipment — a company lets you defer personal tax on money you have not taken. Companies can also make employer pension contributions, which many owners find to be the most valuable lever of all.

The quieter differences

• Privacy: company accounts and directors' details are public at Companies House; a sole trader's affairs are not.
• Credibility: some clients, particularly agencies and larger firms, prefer or require dealing with a company.
• Losses: early sole-trader losses can often be set against other income, which suits ventures with an expensive first year.
• Discipline: company money is not your money. Treating the company account as a personal purse creates genuine legal and tax problems — some people find the enforced separation clarifying, others find it suffocating.

When each fits

Sole trader fits when you are starting out, profits are modest or unpredictable, risk is low or insurable, and simplicity has value to you. A company fits when liability genuinely worries you, profits are consistently strong, you want to retain earnings or make employer pension contributions, or your market expects it. If you are on the fence, the tiebreaker is rarely tax: it is whether you want the protections and formality of a company enough to feed its paperwork every year. And the decision is not permanent: incorporating later is straightforward and common; going back the other way is messier. Reviewing the question once a year, with real numbers, costs almost nothing.

Whichever you choose, the bookkeeping underneath is the same discipline — and it is what we do all day, under one model: AI drafts. AgentLedger validates. People approve. For eligible ordinary private limited companies with turnover under £500,000 our price is £350 per year, collected in monthly instalments across the tax year; for sole traders and everyone else we quote individually. Ask for Details and we will tell you exactly where your business would stand.