If you're running a business in Macclesfield, Bollington or anywhere across Cheshire, you've probably asked yourself this question at some point: should I be a sole trader, or should I set up a limited company?
For years, the conventional wisdom was simple — once your profits passed a certain point, incorporating saved you tax. That's still broadly true, but the picture has shifted in 2026. Dividend tax rates rose on 6 April 2026, narrowing the gap that used to make incorporation an easy decision at lower profit levels. The right answer now depends much more carefully on your actual numbers.
The basic difference
As a sole trader, you and your business are legally the same entity. There's no distinction between business money and personal money — you simply report your profits on your self-assessment tax return each year and pay tax on the lot.
As a limited company, the business is a separate legal entity from you. The company pays Corporation Tax on its profits, and you then extract money personally through a combination of salary and dividends — each taxed differently, with dividends generally taxed more lightly.
The tax comparison — what's changed in 2026
This is the part most people care about most, so let's get into the detail. As a sole trader, you pay Income Tax (20%, 40% or 45% depending on your earnings) plus Class 4 National Insurance on your profits. As a limited company director, your company pays Corporation Tax first, and then you pay personal tax only on what you extract.
| Tax | Sole Trader | Limited Company |
|---|---|---|
| On business profits | Income Tax: 20% / 40% / 45% | Corporation Tax: 19% (up to £50,000) tapering to 25% (above £250,000) |
| National Insurance | Class 4 NI: 6% (£12,570–£50,270), 2% above | Employee NI: 8% on salary above £12,570. No NI on dividends. |
| On money extracted | N/A — already taxed as profit | Dividend tax: 10.75% basic rate, 35.75% higher rate (from April 2026) |
| Tax-free allowance | Personal Allowance £12,570 | Personal Allowance £12,570 + Dividend Allowance £500 |
Dividend tax rates increased from 6 April 2026 — basic rate rose to 10.75% and higher rate to 35.75%. This has narrowed the tax advantage that limited companies previously held, particularly at lower and middle profit levels. The incorporation decision is no longer the automatic win it once was below around £50,000 profit.
Where does the break-even point sit now?
Based on current 2026/27 rates, here's a general guide to where the numbers tend to favour each structure. These are indicative ranges only — your specific situation may differ.
General guidance by profit level (2026/27)
The key variables that shift this break-even point for your specific business include: how much of the profit you actually need to withdraw each year (retained profit in a company is taxed more lightly than profit you take out), whether you can split income with a spouse who is also a director, and whether you make use of pension contributions as an extraction route.
Liability — often the more important factor
Tax tends to get all the attention, but liability protection is arguably the more significant consideration, especially if your work carries any commercial risk.
As a sole trader, you and your business are legally the same. If your business cannot pay a debt — whether from an unpaid invoice you owe, a contractual dispute, or a negligence claim — your personal assets, including your home, are potentially at risk.
A limited company is a separate legal entity. Your liability is generally limited to the amount you've invested in the company (hence "limited" liability). Your personal assets are protected from business debts in most circumstances, except where you've given a personal guarantee or acted fraudulently.
If you work in a higher-risk trade — construction, consultancy with significant contract value, anything where a mistake could result in a substantial claim — the liability protection of a limited company may be worth more to you than any tax saving, even if the numbers are roughly equal.
Pros and cons side by side
Sole Trader
- Simple to set up — just register with HMRC
- Less admin — one self-assessment return per year
- Lower accountancy costs typically
- Full control — no separate company formalities
- Losses can offset other personal income
- Unlimited personal liability
- All profit taxed as personal income
- Can look less established to clients/lenders
- Harder to bring in investors or sell easily
Limited Company
- Limited liability — personal assets protected
- Tax efficiency at higher profit levels
- More professional, credible image
- Easier to bring in investors or sell the business
- Pension contributions are tax-efficient
- More administration — accounts, CT return, confirmation statement
- Higher accountancy costs (typically £500–£2,000/yr more)
- Less privacy — accounts filed publicly at Companies House
- IR35 risk for certain types of contractor work
The Making Tax Digital factor
From April 2026, Making Tax Digital for Income Tax has begun affecting sole traders and landlords with income over £50,000 — requiring digital record-keeping and quarterly HMRC submissions. This adds administrative burden to the sole trader route that didn't exist before, and is worth factoring into your decision if your income is approaching that threshold. We've written a separate guide on what MTD means in detail if you'd like to read more.
A note for contractors — IR35
If you provide services to clients through a personal services company, your IR35 status is often the deciding factor rather than general tax efficiency. If your work is genuinely "outside IR35" — meaning you have real autonomy and aren't simply a disguised employee — a limited company can still offer a meaningful tax advantage through the salary/dividend split. If your work falls "inside IR35", much of that advantage disappears, and the limited company structure becomes mostly administrative overhead rather than a tax-saving tool.
Other things to consider
- Mortgage applications — sole trader income is often viewed more simply by lenders; limited company income (especially with a low salary) can sometimes complicate affordability assessments
- VAT registration — both structures must register for VAT once turnover reaches £90,000 (2026/27) — this requirement is the same either way
- Switching later — you can incorporate a sole trader business into a limited company later on; it's a well-trodden path and doesn't need to be decided forever
- Naming and branding — a limited company name is protected at Companies House; a sole trader trading name has no such protection
Not sure which structure suits your numbers?
We run the actual figures for your specific situation — not generic averages. Book a free 30-minute call and we'll help you make the right call, whether that means staying a sole trader or incorporating.
Book a free 30-minute call →Summary
There's no single right answer — it depends on your profit level, how much you need to withdraw, your appetite for admin, and how much liability protection matters to your particular business. As a general rule for 2026/27:
- Under roughly £40,000 profit — staying a sole trader is usually simpler with similar overall tax
- £40,000–£60,000 — a genuinely close call that depends on your specific circumstances
- Above £60,000 — a limited company typically starts to offer a meaningful tax advantage
- Regardless of profit level — if liability protection matters to your type of work, that may outweigh the tax calculation entirely
The dividend tax changes in April 2026 mean this is a better year than most to actually run the numbers properly rather than relying on rules of thumb from a few years ago.
This article is for general guidance only and does not constitute professional advice. Every business is different and the figures used are illustrative. Please contact us to discuss your specific circumstances before making a decision. JAC Accountancy Solutions Limited is regulated by ICAEW (Membership No. 8650147).