| Income tax | 20, 40, 45 percent above the £12,570 personal allowance |
| National Insurance, sole trader | Class 4: 6 percent up to £50,270, 2 percent above |
| Corporation tax, limited company | 19 to 25 percent |
| Dividends | £500 free, then 10.75, 35.75 or 39.35 percent |
| Liability | sole trader unlimited; company shareholders up to unpaid share capital |
Two routes into self-employment
The sole trader is the UK's one-person business. You register with HMRC for Self Assessment, keep books of income and expenses and pay income tax and Class 4 National Insurance on the profit. There is no Companies House registration and no public accounts. In return you are liable with everything you own.
The private limited company is a legal person in its own right. It pays corporation tax on its profit; you take salary, dividends or both. Shareholders are only liable up to any unpaid share capital. Duties come with it: registration and identity verification at Companies House, annual filings, accounts, the company's tax return. What that means for directors is in directors' liability.
A worked example with £50,000 profit
Simplified: resident in England, no other income, full personal allowance, no associated companies, no salary from the company, all post-tax profit paid out. Tax year 2026/27.
| Sole trader | Limited company with dividend | |
|---|---|---|
| Profit | £50,000 | £50,000 |
| Corporation tax at 19 percent | none | £9,500 |
| Income tax | £7,486 (20 percent on £37,430) | £2,949 (10.75 percent on £27,430 of dividend after the allowances) |
| Class 4 National Insurance | £2,246 (6 percent on £37,430) | none on dividends |
| Total tax and contributions | about £9,732 | about £12,449 |
Our calculation using the GOV.UK rates (Income Tax rates, Self-employed National Insurance rates, Corporation Tax rates, Tax on dividends)
What the example shows, and what it does not
With £50,000 profit and everything paid out as dividends, the sole trader is about £2,700 cheaper in this simplified case. That surprises many who remember the old days when the company almost always won. Since corporation tax on small profits sits at 19 percent and dividends from 2026/27 are taxed at 10.75 percent in the basic band, the gap has narrowed or reversed.
What the example leaves out: a small salary from the company, company pension contributions, profits kept in the company and paid out later, and marginal relief between £50,000 and £250,000. Keep profits in the company and you pay only corporation tax at first. That can be the real advantage of the company, especially at higher profits, where the sole trader quickly slips into the 40 percent band. The extraction routes are in salary or dividend.
When the company is still the better choice
Tax is not everything. Typical reasons for the company:
- You carry a real liability risk, for example from contracts, products or staff.
- Your customers, especially larger firms, only work with companies.
- You want to build up profits in the company and pay them out later.
- You want to take in partners, sell shares or hand the business on later.
- You want to hire staff; the company registers as an employer for that.
Duties and deadlines compared
As a sole trader you register with HMRC; if you must file a return for the past tax year, tell HMRC by 5 October. New is Making Tax Digital for income tax: if your self-employment and property income was over £50,000, you have had to keep digital records and report quarterly since April 2026. The threshold falls to £30,000 from April 2027 and £20,000 from April 2028.
The company has its own duties: confirmation statement, annual accounts, the company's tax return, payroll once it pays a salary. Most self-employed people hand that to an accountant. The route to the company is described under UK company formation.
Whether you are taxable in the UK or at home is decided first by residence. If you move to the UK and become self-employed there, check the year of the move, a possible split year and the new four-year regime for foreign income before choosing the legal form. That is exactly what we settle in a UK Tax Consult.
Frequently asked questions
Can I move from sole trader to a limited company later?
Yes. Many start as sole traders and form the company when profit and risk grow. The switch has its own tax consequences, which you plan beforehand.
Is a limited company always sensible for freelancers?
No. At smaller and middling profits the sole trader is often level or ahead for tax. For freelancers working through their own company for large clients, the rules on false self-employment (IR35) come into play too.
Do the figures apply in Scotland?
No, Scotland has its own income tax bands. The example uses the bands HMRC publishes for taxpayers outside Scotland.
Sources: GOV.UK: Income Tax rates and Personal Allowances; GOV.UK: Self-employed National Insurance rates; GOV.UK: Corporation Tax rates; GOV.UK: Tax on dividends; GOV.UK: Register for Self Assessment; GOV.UK: Find out if and when you need to use Making Tax Digital for Income Tax
