Should I Go Ltd?

The 2025/26 reality: sole trader vs limited company with real numbers

In 2025/26, for a typical one-person service business taking all profits out each year, incorporating does not beat remaining a sole trader at any profit level from £30,000 to £200,000 once you factor in 15% employer NI from April 2025 and the reduced £500 dividend allowance. The old 'go Ltd at £50k' rule of thumb is dead. Ltd only wins when you retain profits in the company, use pension contributions aggressively, or have commercial reasons like limited liability or client requirements.

Last reviewed: 26 May 2026

Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

Assumptions and headline rules

All figures below use 2025/26 rUK (England, Wales, NI) rates. Personal Allowance £12,570 (tapered above £100k). Income tax bands: 20% to £50,270, 40% to £125,140, 45% above. Class 4 NIC 6% (£12,570–£50,270) and 2% above. Corporation Tax: 19% small profits (<£50k), 25% main (>£250k), 26.5% effective marginal rate (£50k–£250k). Dividend tax: 8.75%/33.75%/39.35% above the £500 dividend allowance. Employer NI: 15% above £5,000 secondary threshold (from April 2025). Ltd modelling assumes optimal salary at the secondary threshold (£5,000) and the rest extracted as dividends. Pure-extraction means all post-tax profit taken out each year; retention is modelled separately.

Sole trader numbers

Sole trader pays income tax + Class 4 NIC on profit (Class 2 abolished from April 2024 for those with profits above the small profits threshold; voluntary thereafter). No corporation tax, no dividend tax, no employer NI.

Sole trader tax stack 2025/26

Profit	Income tax	Class 4 NIC	Total tax	Take-home
£30,000	£3,486	£1,046	£4,532	£25,468
£50,000	£7,486	£2,246	£9,732	£40,268
£80,000	£19,432	£2,840	£22,272	£57,728
£120,000	£39,432	£3,640	£43,072	£76,928
£200,000	£77,703	£5,240	£82,943	£117,057

Ltd company numbers

Ltd modelling: £5,000 salary (at secondary threshold, no employer NI, full income tax PA covers it), rest as dividends. Corporation tax on (profit – salary). Personal tax on dividend extraction above the £500 allowance and the unused PA portion.

Ltd pure-extraction tax stack 2025/26 (£5k salary + dividends)

Profit	Corporation tax	Dividend tax	Employer NI	Total tax	Take-home
£30,000	£4,750	£1,028	£0	£5,778	£24,222
£50,000	£8,550	£3,166	£0	£11,716	£38,284
£80,000	£18,975	£8,956	£0	£27,931	£52,069
£120,000	£29,575	£17,656	£0	£47,231	£72,769
£200,000	£50,775	£37,872	£0	£88,647	£111,353

Net comparison with compliance drag

Comparing the two side-by-side, then layering in the realistic ~£1,500/year compliance cost of running a Ltd (accountant for statutory accounts, CT600, payroll, confirmation statement, additional bookkeeping).

Sole trader vs Ltd, with £1,500/year compliance cost added to Ltd

Profit	Sole tax	Ltd tax	Difference (Ltd – sole)	Plus compliance	Net Ltd position
£30,000	£4,532	£5,778	+£1,246	+£1,500	£2,746 worse as Ltd
£50,000	£9,732	£11,716	+£1,984	+£1,500	£3,484 worse as Ltd
£80,000	£22,272	£27,931	+£5,659	+£1,500	£7,159 worse as Ltd
£120,000	£43,072	£47,231	+£4,159	+£1,500	£5,659 worse as Ltd
£200,000	£82,943	£88,647	+£5,704	+£1,500	£7,204 worse as Ltd

When Ltd does still make sense

Three scenarios where Ltd is still the right answer despite the pure-extraction maths.

1. You retain value in the company

If you don't need all the cash each year, leaving post-corporation-tax profit inside the company defers the dividend tax indefinitely. With CT of 19–26.5%, retained profits grow faster than personally taxed profits would. On eventual sale or MVL closure with Business Asset Disposal Relief at 10% (under the £1m lifetime limit), the total effective rate on retained value can be 25–35% versus ~47% via dividends. From ~£80k profit upwards, retaining 30%+ of post-CT profit usually puts Ltd back ahead.

2. Pension contributions

Employer pension contributions of up to £60,000/year (Annual Allowance) plus carry-forward (3 prior years' unused allowance) are corporation tax deductible, attract no NI, and bypass the £100k Personal Allowance taper. A sole trader's pension contributions are personal — capped by relevant earnings, no NI advantage. For an £80k–£200k owner-manager actively building pension wealth, the Ltd pension route alone can save £5,000–£20,000/year.

3. Commercial and risk reasons

Limited liability (creditors can only pursue company assets, not personal — subject to wrongful trading carve-outs under IA 1986 s.214). Client mandate (many large corporates and public-sector procurement teams will only contract with limited companies, not sole traders). Future sale or investment (only a Ltd can raise share capital, grant EMI options, or be sold as a share sale with BADR). Asset protection in regulated sectors. These are sometimes worth thousands a year of extra tax to access.

What nobody tells you

The structural traps that don't show up in the headline tax comparison.

IR35 kills the case

If your contracts are inside IR35 (Chapter 10 ITEPA 2003), the deemed employment income calculation strips out almost all the salary/dividend advantage. Inside IR35 = no tax case for Ltd, full stop.

The retained-profits trap

Retaining inside the company is great until you finally need the cash for personal use. Extracting £100k of retained post-CT profit as a dividend in a single year stacks on top of any other income and easily hits the 33.75% higher rate or 39.35% additional rate, plus £100k PA taper if applicable. Combined effective rate on that £100k can be in the high 40%s.

Director's Loan Account s.455 charge

If you 'borrow' from your company and the loan isn't repaid within 9 months and 1 day of the company's year-end, the company pays a 33.75% s.455 charge on the outstanding balance. Repaid eventually, repayable to the company — but a real cashflow hit and a complication most first-time directors don't see coming.

Spouse shareholding and the settlements legislation

Gifting shares to a non-earning spouse to use their dividend bands works (the Arctic Systems case settled the question), but only if structured as a genuine gift of full equity rights — not a temporary income-shifting arrangement. Get the share class structure wrong and HMRC can challenge under the settlements legislation (ITTOIA 2005 Part 5 Chapter 5).

Hard to unwind

Closing a Ltd with significant retained profits via MVL costs £1,500–£4,000 in IP fees. Striking off (DS01) without distributing retained cash properly risks bona vacantia (cash forfeited to the Crown). Sole trader cessation is a tickbox on your final SA return.

How to frame the answer

The honest 2025/26 answer at each profit level for a typical one-person service business taking profits out each year:

£30k profit

Stay sole trader. Ltd costs £2,700/year more with zero offsetting benefit at this scale.

£50k profit

Stay sole trader. Ltd costs £3,500/year more. Approaching the band where retained profits or pension start to matter, but not yet.

£80k profit

Sole trader on pure extraction (~£7k/year cheaper). Ltd starts to make sense if you will retain 30%+ of profit or contribute £20k+/year to a pension via the company.

£120k profit

Sole trader still cheaper on pure extraction. Ltd typically wins here on pension contributions alone (employer contributions bypass the PA taper that personal contributions don't fully fix).

£200k profit

Ltd for planning, not for simple tax reduction. The case is built on pension contributions, retained value, BADR exit planning, and asset protection — not on year-on-year extraction maths.

Statute references: CTA 2009 / CTA 2010 (Corporation Tax); ITTOIA 2005 (Income Tax on trading and dividend income); ITTOIA 2005 Part 5 Chapter 5 (settlements legislation); ITEPA 2003 Chapter 10 (IR35 / off-payroll working); Finance Act 2024 (employer NI changes); Companies Act 2006.

Frequently asked questions

What happens if I miss the Self Assessment deadline?+

The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.

Do I need an accountant or can I file Self Assessment myself?+

Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.

How do payments on account work?+

When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.

At what profit does Ltd become worth it on pure tax?+

On a pure-extraction basis (taking all profits out each year as optimal salary + dividend), in 2025/26 Ltd does not beat sole trader at any profit level from £30,000 to £200,000+ once you include 15% employer NI from April 2025, the £500 dividend allowance, and the typical £1,500/year compliance cost. The classic 'breakeven at ~£40-50k' rule of thumb was killed by three reforms: dividend allowance cut from £5,000 to £500, employer NI threshold cut from £9,100 to £5,000 with rate rising from 13.8% to 15%, and corporation tax marginal relief introducing the 26.5% effective rate between £50k and £250k. Ltd only beats sole trader when you retain profits or use pension contributions.

What about pension contributions through a company?+

This is the single largest remaining Ltd advantage. A company can make employer pension contributions of up to £60,000/year (annual allowance) plus carry-forward of unused allowance from the previous 3 years — potentially £200,000+ in one year. Employer contributions are corporation tax deductible, attract no employer NI, and do not count toward the recipient's £100k Personal Allowance taper. A sole trader can also make pension contributions but they sit against personal income, are capped by relevant earnings, and lose the NI advantage. For owner-managers with £80k+ profits who want to build long-term pension wealth, this alone can justify Ltd structure.

What is IR35 and does it affect the decision?+

IR35 (Intermediaries Legislation, now Chapter 10 of ITEPA 2003) applies when you provide services through a Personal Service Company (PSC) but the underlying relationship with the end client looks like employment. Since April 2021, for medium and large end clients in the private sector, the client (not you) determines status. If you are 'inside IR35', the deemed employment payment effectively wipes out the salary/dividend tax advantage of the Ltd structure — you pay tax broadly as if employed, plus the cost of running the Ltd. Inside IR35, the Ltd structure is purely cost — there is no tax case for it. Outside IR35, the standard Ltd vs sole trader analysis applies.

How much does it cost to close a Ltd company?+

If the company has no significant retained profits or assets, you can use the Companies House DS01 strike-off process for a £33 fee — but only if there's no significant cash left to extract (otherwise it's bona vacantia and goes to the Crown). If retained profits exceed about £25,000, a Members' Voluntary Liquidation (MVL) becomes attractive because distributions to shareholders are treated as capital (often 10% Business Asset Disposal Relief) rather than dividend income (up to 39.35%). An MVL costs £1,500–£4,000 in insolvency practitioner fees. Either way, closing is materially more expensive and slower than ceasing to trade as a sole trader (which is a tickbox on your final SA return).