The 2026/27 Reality: The Window Has Closed

Conventional wisdom says go limited above £40,000 of profit. The 2026/27 tax rules tell a different story. After the April 2026 dividend rate rises (basic 8.75% → 10.75%, higher 33.75% → 35.75%) on top of the April 2025 employer-NI changes (rate up to 15%, secondary threshold down to £5,000), the narrow Limited Company advantage that existed in 2025/26 has effectively closed. With a £12,570 director salary, sole trader is now better at every profit level we've tested, from £40k to £200k+. The closest the two come is around £60,000 of profit, where sole trader still wins by ~£20. Below £55k or above £80k the gap widens quickly.

Switch the calculator's tax year toggle to 2025/26 to see the previous picture, where Limited Company was tax-efficient between roughly £55,500 and £70,500. That historical comparison is now mainly useful for understanding what changed.

Why the window closed

Four forces compound. First, employer NI on a £12,570 director salary costs the company £1,135.50 every year (15% on the £7,570 above the £5,000 secondary threshold) — a fixed deadweight cost that has to be recovered. Second, the moment post-salary profit crosses £50,000, Corporation Tax marginal relief kicks in at an effective 26.5% rate — almost as harsh as personal Income Tax above £50,270. Third, dividend tax in the higher-rate band is now 35.75% — barely below a sole trader's 42% combined IT + Class 4 NI, but with Corporation Tax already taken on the way out. Fourth, the basic-rate dividend rate rose to 10.75%, so the limited-company side loses ground on the lower band as well. Stack all four and the net effective rate on extracted profit beats sole trader at no salary or profit level we tested.

How sole trader tax works

On the sole trader side it's straightforward. You pay UK or Scottish Income Tax on profit above the £12,570 Personal Allowance, plus Class 4 National Insurance at 6% on profit between £12,570 and £50,270 and 2% above. There's no separation between business and personal money — the profit IS your income, drawn whenever you like. Class 2 NI was abolished from April 2024. For a deeper breakdown including the payment-on-account schedule and trading allowance handling, see the Self-Employed Tax Calculator.

How limited company tax works

On the limited company side, profit stays inside a separate legal entity. Corporation Tax is charged at 19% up to £50,000 of profit-after-salary, then through marginal relief (effective 19% climbing to 25%, marginal rate 26.5%) up to £250,000, then a flat 25% above. To extract money you take a director salary plus dividends from post-Corporation-Tax profit. The standard tax-efficient pattern for a single-director company is salary set at £12,570 — exactly the Personal Allowance — followed by all distributable profit as dividends. The salary is a deductible expense for the company (saving 19–25% Corporation Tax) but triggers £1,135.50 of employer NI. Single-director companies cannot claim the £10,500 Employment Allowance, so this is fully owed. Dividends above the £500 dividend allowance are taxed at 10.75% basic / 35.75% higher / 39.35% additional for 2026/27 (raised from 8.75% / 33.75% in 2025/26), stacked on top of your salary in the Income Tax band layout. Dividend tax uses UK bands regardless of residence — Scottish residents get their salary taxed at Scottish rates but dividends at UK rates.

Beyond tax: admin, IR35, drawing money out

Tax is one consideration. A limited company requires Companies House filings (annual accounts and confirmation statement), Corporation Tax returns, dividend documentation, and a separate corporate bank account. Accountancy fees typically run £1,000–£2,000 per year, sometimes more for complex arrangements. Drawing money out is more rigid: dividends can only be paid from distributable reserves, which means tracking retained profits across years. On the upside: limited liability protects personal assets, profits can be retained inside the company to defer tax, and incorporated status sometimes opens doors with corporate clients. IR35 (off-payroll working rules) deserves its own analysis — if your engagement is deemed inside-IR35, the limited-company tax advantage disappears entirely.

What changed on 6 April 2026

The 6 April 2026 dividend rate rise is what closed the window. Dividend basic rate went from 8.75% to 10.75%, and dividend higher rate from 33.75% to 35.75%. Additional rate (39.35%) is unchanged. Corporation Tax rates and Income Tax thresholds remain frozen until April 2031. For a typical owner-director taking £40,000 of dividends in the basic-rate band, the rate change adds about £800 of extra tax per year — and that was the marginal cost that flipped the comparison. The 2025/26 narrow win zone of £55,500–£70,500 is now sole-trader territory at every profit level.

Run your actual numbers

Plug your profit into the calculator above. It works through Corporation Tax marginal relief, the Personal Allowance taper above £100,000 of personal income, and the dividend-stacking-on-salary band logic — the things that catch out most rule-of- thumb comparisons. If the difference is under £2,000 a year, the admin overhead probably eats the saving.