Search for a sole trader vs limited company tax calculator and you will find plenty of tools that spit out a number. Enter your profit, click a button, and the calculator tells you the limited company saves you £X per year. Job done — or so it seems.

In our experience, those numbers are rarely wrong, but they are almost always incomplete. A calculator models the tax. It does not model your circumstances, your appetite for admin, your growth plans, or what happens when HMRC starts asking questions. We work through this comparison with clients regularly, and the honest answer is that the right structure depends on what the numbers sit on top of.

What follows is a plain-English breakdown of how each structure is taxed in 2026, a worked example at a couple of common profit levels, and the factors that a calculator will not pick up. If you want the firm’s view: for most people earning above roughly £35,000 in net profit, incorporation is worth at least a serious conversation.

As a sole trader, your business profit is your personal income. There is no separation between you and the business in the eyes of HMRC, which keeps things simple but also means you pay tax at the marginal rate as profit rises.

For the 2025/26 tax year, the personal allowance sits at £12,570. Profit above that is taxed at 20% up to £50,270, then 40% on earnings between £50,271 and £125,140, and 45% on anything above that. On top of income tax, you pay Class 4 National Insurance on profits above the lower profits limit — currently 9% up to the upper profits limit and 2% above it — plus a flat Class 2 charge if your profits clear the small profits threshold.

The combined effect is that a sole trader earning £60,000 in profit is paying income tax at 40% on a meaningful slice of their earnings, plus NI on top. The effective rate on that top portion is closer to 42–43%.

From April 2026, Making Tax Digital for Income Tax also applies to sole traders with turnover above £50,000, which means quarterly digital submissions and a change in how your record-keeping needs to work. That is an administrative consideration worth factoring in, not just a tax one.

A limited company pays corporation tax on its profits, then you extract money personally — usually as a combination of salary and dividends. The split matters because salary is a deductible expense for the company, and dividends are taxed at lower rates than employment income.

Corporation tax currently sits at 19% on profits up to £50,000 (the small profits rate) and 25% on profits above £250,000. There is Marginal Relief for the band in between. For most owner-managed companies with profits under £50,000, 19% is the starting point.

Most director-shareholders take a salary set around the National Insurance secondary threshold — enough to preserve state pension entitlement without triggering significant NI — and draw the remainder as dividends. The dividend allowance for 2026/27 is £500 per year. Dividends above that allowance are taxed at 8.75% if they fall within the basic rate band, and 33.75% at the higher rate.

The mechanics mean that a director-shareholder extracting £60,000 from a company with £60,000 of profit will generally pay less total tax than a sole trader on the same profit — sometimes significantly less. But the gap narrows at lower profit levels, and there are real costs on the limited company side that the calculator tends to ignore.

Numbers make this easier to see. These are rounded illustrations, not personalised advice — actual figures depend on your specific salary and dividend mix, other income, and reliefs available.

At £40,000 profit

A sole trader at this level pays income tax on roughly £27,400 of profit after their personal allowance, plus Class 4 NI. The total tax and NI bill comes to somewhere in the region of £7,000–£8,000. A limited company with the same profit pays corporation tax at 19%, leaving retained profit of around £32,400. With an optimal salary-dividend split, the director-shareholder’s personal tax and NI typically comes to less — often by £1,500 to £2,500. At this profit level, the saving is real but modest. Depending on accountancy fees for the additional compliance, the net gain can be small.

At £70,000 profit

This is where the gap widens. A sole trader at £70,000 is paying 40% on a substantial portion of income, plus NI. Total tax and NI can approach £22,000 or more. A limited company with well-structured extraction can cut that materially — potentially by £5,000 to £8,000 per year, depending on how efficiently profits are drawn. At this level, incorporation almost always makes sense on the numbers alone, provided you can handle the additional compliance obligations.

A sole trader vs limited company tax calculator gives you a tax comparison. It does not give you the full picture.

The first thing it misses is cost. Running a limited company means filing statutory accounts, a corporation tax return, a confirmation statement, and typically a director’s Self Assessment. If you are not already paying for these, your accountancy fees will rise. A saving of £1,800 in tax that costs £1,200 in additional accountancy fees is a net gain of £600, which might still be worth it — but the raw calculator figure overstated it.

The second is flexibility. Sole traders can draw money from the business without any formality. Directors have to be more structured about how and when they extract cash, which can complicate short-term cash flow planning.

The third is the MTD point mentioned above. From April 2026, sole traders with turnover above £50,000 face quarterly digital submissions under Making Tax Digital for Income Tax. Limited companies are currently outside this requirement. For some businesses, that tips the admin balance further towards incorporation.

Finally, there is liability. A limited company gives you a legal separation between personal and business assets that a sole trader structure does not. That is not a tax point, but it matters to a lot of people — and it belongs in the same conversation.