Someone at a job, a pub or a networking breakfast will tell you that going limited saves tax. Sometimes it does. Often it saves less than the extra paperwork costs. Here is how to tell which side you're on.
How each one is taxed
Sole trader. You and the business are the same person. Your profit after expenses is your income, taxed at the usual personal rates (at the time of writing, 20% above the personal allowance of £12,570, then 40% above £50,270), plus Class 4 National Insurance on the profit (6% between the same two figures, then 2%). It's taxed whether or not you take the money out.
Limited company. The company is a separate legal person. It pays corporation tax on its profit (19% on profits up to £50,000, 25% above £250,000, with a sliding scale between). You then take money out as salary, which is taxed through payroll, or as dividends, which are taxed at their own rates after an annual allowance. Tax rates on dividends have risen recently, so use current figures, not last year's.
All of this is general guidance at 2026 to 2027 rates. We run the numbers on your actual figures in a free 15-minute call.
Where the saving comes from
Only in one place: profit you leave in the company. If you need all the profit to live on, you'll draw it all, and the tax comes out about the same either way. The difference appears when the company makes more than you spend, and the rest can sit in the business at corporation tax rates until you need it.
What it costs
The tax saving has to cover the extras. A limited company needs accounts filed at Companies House for anyone to read, a corporation tax return, a confirmation statement every year, a director's payroll, and a separate bank account. Our own fees show the gap: £60 a month for a sole trader up to £50,000 of turnover and £150 for a company. That's £90 a month more, or £1,080 a year, so the company has to save you more than that before it's even level. It has to save more again to repay the time you spend on it.
Other things to weigh
- Liability. A company's debts are generally the company's, not yours. For a trade with big jobs, that matters. It isn't absolute: personal guarantees and unpaid tax can still reach you.
- Clients. Some contractors and larger customers prefer or insist on a limited company.
- Privacy. A company's accounts and directors are public at Companies House.
- Making Tax Digital. The Income Tax rules do not apply to your company. They would still apply to any sole trader or rental income you keep in your own name.
- Mortgages and pensions. Both work either way, but they're assessed differently. Ask your broker before you switch, not after.
When it often makes sense
When your profit is comfortably more than you spend. When you plan to employ people, buy equipment through the business, or sell it one day. When a client needs it.
When it often doesn't
When you draw nearly everything you earn. When your profit is modest and your admin patience is lower still. When the main attraction is something someone said at a barbecue.
What switching involves
Setting up the company, registering it with HMRC, and for construction work registering it for CIS. Moving your van and tools across is treated as a sale to the company, which can have tax consequences. The final sole trader return has to be planned so no income falls between the two. VAT registration moves over too. Our switch fee is a one-off £495 plus the Companies House fee at cost, and we only quote it when the numbers say yes.
General guidance, not advice on your own position. Tax rates and thresholds checked against gov.uk on 18 September 2026. Dividend rates in particular may have changed.
Want us to run your numbers?
Tell us your turnover, your expenses and what you take home. If staying put is the better answer, that's what we'll say.