How a sole trader is taxed
All of the profit is yours and is taxed through Self Assessment, whether you draw it or not. In 2026/27 the personal allowance is £12,570, income tax is 20% up to £50,270, 40% above that and 45% over £125,140, and Class 4 National Insurance is 6% on profits between £12,570 and £50,270 and 2% above.
How a company owner is taxed
The company pays Corporation Tax on its profit: 19% up to £50,000, 25% above £250,000, with Marginal Relief between. Money then reaches you as salary, taxed through payroll, or as dividends from profits after tax.
| Dividend tax band | 2026/27 rate |
|---|---|
| Within the £500 dividend allowance | 0% |
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Employer National Insurance is 15% on salary above £5,000. The Employment Allowance, worth up to £10,500, is not available where the only person on the payroll is a sole director, so the salary level needs setting with that in mind.
What tips the decision
- Profit level: the gap in tax usually only opens up at higher profits, and the 2026 dividend rate rise has narrowed it.
- What you take out: profit left in the company is taxed only at Corporation Tax rates until you draw it.
- Limited liability: a company separates business debts from your personal assets, with exceptions such as personal guarantees.
- Admin: a company files statutory accounts, a CT600 and a confirmation statement, runs payroll and keeps its directors’ identities verified.
- How clients see you: some contracts and larger clients will only work with a company.
We run the numbers both ways with your own figures before you decide, and handle the switch if a company makes sense.
Frequently Asked Questions
What are the UK dividend tax rates for 2026/27?
10.75% at basic rate, 35.75% at higher rate and 39.35% at additional rate, after a £500 dividend allowance.
At what profit is a limited company worth it?
There is no single figure. It depends on how much you draw, other income and the extra running costs, so it is worth modelling with your own numbers.
Can a sole director claim the Employment Allowance?
No. A company whose only employee paid above the secondary threshold is its sole director cannot claim it.
Can I switch from sole trader to a company later?
Yes. Many businesses start as sole traders and incorporate as profits grow. The timing and how assets move across are worth planning.
Sources (4)Checked 29 October 2026
This guide is general information, not advice for your situation. Rules change, so check the official sources or talk to us before acting on it.