Employment or other income outside the business
Reg. 07380272 · England & Wales · Est. 2010
Thinking of incorporating?
Switching from sole trader to a limited company is a big decision. Get expert advice on whether it is right for you.
Sole Trader
Net Income
£40,088.80
Effective Rate
19.8%
Limited Company
Net Income
£38,861.95
Effective Rate
22.3%
Sole Trader Breakdown
| Item | Sole Trader | Limited Company |
|---|---|---|
| Business Profit | £50,000.00 | £50,000.00 |
| Income Tax | £7,486.00 | £0.00 |
| Employee NI | — | £0.00 |
| Class 2 NI | £179.40 | — |
| Class 4 NI | £2,245.80 | — |
| Employer NI | — | £1,135.50 |
| Corporation Tax | — | £6,895.96 |
| Dividend Tax | — | £3,106.59 |
| Total Tax | £9,911.20 | £11,138.05 |
| Net Income | £40,088.80 | £38,861.95 |
Why is £12,570 the optimal director salary?
This is the NI Primary Threshold and matches the Personal Allowance, meaning no employee NI and no income tax on the salary. Employer NI is minimal as the Secondary Threshold is £5,000.
What are Class 2 and Class 4 NI?
Class 2 NI is a flat weekly rate (£3.45/week) for self-employed people. Class 4 is a percentage of profits: 6% on profits between £12,570 and £50,270, and 2% above £50,270.
How are dividends taxed?
Dividends have a £500 tax-free allowance. Above that, they're taxed at 8.75% (basic), 33.75% (higher), and 39.35% (additional rate), based on your total income.
When should I incorporate?
Generally, limited companies become more tax-efficient when profits exceed around £30,000-£40,000. However, consider additional costs like accountancy fees, Companies House filing, and administrative complexity.
HMRC-Aligned: This calculator uses official 2025/26 tax rates, NI thresholds, and corporation tax rates. Actual results may vary depending on your specific circumstances. Consult an accountant for personalised advice.
This calculator uses official rates and thresholds from:
- Income tax rates and bands
- Self-employed National Insurance (Class 2 & 4)
- Corporation Tax rates
- Tax on dividends
Last verified: February 2026 · Tax year 2025/26. Results are indicative — consult a qualified accountant for personalised advice.
The key differences and which structure could save you money
What is the main difference between a sole trader and a limited company?
A sole trader is you trading as yourself — there is no legal separation between you and your business. A limited company is a separate legal entity that you own and direct. This matters because as a sole trader, you are personally liable for all business debts. With a limited company, your personal assets are usually protected if the business fails, though banks may ask for personal guarantees on loans.
How is a sole trader taxed?
Sole traders pay income tax on their business profits after allowable expenses. In 2025/26, you get a £12,570 Personal Allowance, then pay 20% up to £50,270, 40% up to £125,140, and 45% above that. You also pay Class 2 NI (£3.45 per week) and Class 4 NI at 6% on profits between £12,570 and £50,270, then 2% above that. On £50,000 profit, your total tax and NI bill is roughly £11,400.
How is a limited company taxed?
A limited company pays Corporation Tax on its profits — 19% for profits up to £50,000 and 25% for profits over £250,000, with marginal relief in between. As a director, you then pay yourself a salary (which is a company expense) and dividends from after-tax profits. Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) after a £500 tax-free dividend allowance.
At what profit level does a limited company save you money?
Generally, a limited company starts saving tax when your profits go above roughly £30,000 to £35,000 per year. Below that, the extra costs of running a company (accountancy fees of £1,000–£2,000, filing requirements, and payroll) can wipe out any tax saving. At £50,000 profit, a limited company typically saves £2,000–£4,000 per year compared to being a sole trader.
What are the extra costs of running a limited company?
A limited company must file annual accounts with Companies House (£13 online), a Confirmation Statement (£13), and a Corporation Tax return with HMRC. You will likely need an accountant, costing £1,000 to £2,500 per year. You must also run payroll for director salaries and keep statutory records. As a sole trader, you just file one Self Assessment return and keep basic records.
What is the best salary and dividend split?
Most accountants suggest paying yourself a salary equal to the NI Primary Threshold (£12,570 in 2025/26) to protect your State Pension record without triggering NI. Then take the rest as dividends. On £60,000 company profit, you might pay a £12,570 salary (saving the company roughly £1,900 in employer NI) and take about £38,000 in dividends, keeping your personal tax bill low.
Can you switch from sole trader to limited company?
Yes, and it is straightforward. You register a company at Companies House, open a business bank account, inform HMRC, and transfer your business activities. You do not need to close your Self Assessment — keep it open for your director tax return. Many people switch mid-year, running as a sole trader for part of the year and a limited company for the rest.
What about IR35 if you are a contractor?
If you work through a limited company but HMRC considers you an employee of your client (inside IR35), you pay tax as if you were an employee, losing most of the tax benefits of a company. Since April 2021, medium and large clients decide your IR35 status. If you are caught inside IR35, your take-home pay on a £500 daily rate could drop by £10,000–£15,000 per year.
HMRC-Aligned: Based on 2025/26 HMRC rates and thresholds. For personal advice, speak to a qualified accountant or tax adviser.
Reviewed by M. Samiuddin Quadri, ACCA — Chartered Certified Accountant at Gladstone & Co. · Updated for the 2025/26 tax year.
Disclaimer: This calculator provides estimates based on current HMRC rates and thresholds for the 2025/26 tax year. It does not constitute professional tax, financial, or legal advice. Your actual liability may differ depending on your individual circumstances. Always consult a qualified accountant or tax adviser before making financial decisions. Read our terms