Why there's no single answer
As a sole trader, all profit is yours and taxed once (income tax + Class 4 NI). Through a company, profit is taxed twice — corporation tax (19–25%), then again personally when extracted as dividends — but at rates that, combined, can undercut the sole trader total if profits are high enough and especially if you don't need to extract everything. The crossover isn't a magic number; it depends on how much you take out, other income, and whether you'll use the company to retain and reinvest.
Rule of thumb before the detail: below ~£30k of profit, stay sole trader. Above ~£50k with money left in the business, a company deserves a proper look. Between, the non-tax factors usually decide. The full guide runs the actual numbers at three profit levels and lists those non-tax factors honestly.
The maths at three profit levels (2026/27 rates, extracting everything)
£30,000 profit: Sole trader total ≈ £4,530. Company route (optimal salary + dividends) lands within a few hundred pounds either way once you account for accountancy costs and payroll admin. Verdict: not worth it for tax alone.
£50,000 profit: Sole trader ≈ £9,730. Company route typically saves roughly £1,000–£2,000 — real, but paying for extra accountancy and admin out of it. Verdict: borderline; decide on the non-tax factors.
£80,000 profit, extracting it all: the company saving grows to several thousand a year. £80,000 extracting only £50,000 and retaining the rest: the saving becomes substantial — retained profit sits taxed at corporation tax rates only, compounding for reinvestment, equipment or pension funding. Verdict: this is where companies genuinely shine — when the business earns more than the owner needs to live on.
(Illustrative and rounded; your other income, pension plans and Scottish bands all move the line. We run your exact numbers as part of every Pro package review.)
The non-tax factors — often the real decision
For a company:
- Limited liability — business debts belong to the company. If your trade carries real risk, this can outweigh tax entirely.
- Credibility & contracts — some clients and industries insist on ltd status.
- Pension firepower — company pension contributions are deductible and NI-free, the single best extraction route for high earners.
- Sale & succession — companies can be sold, gifted, and structured.
Against:
- Admin doubles — statutory accounts, corporation tax return, confirmation statement, payroll for yourself, dividend paperwork, plus your personal return still.
- Privacy halves — accounts summary and your name on the public register (with fuller profit disclosure coming under Companies House reform).
- Money isn't yours anymore — it's the company's until properly extracted; dipping in casually creates director's-loan tax traps.
- Losses are locked in — early-years losses can't offset your other personal income the way sole trader losses can.
Switching cleanly, if yes
- Time it to a natural break — your accounting year-end or 5 April.
- Incorporate with a sensible share structure (see our sister site's company formation guide).
- Transfer the trade properly — goodwill, equipment and stock have tax treatments worth getting right; incorporation relief usually defers any capital gain.
- Tell everyone — HMRC (cease self-employment; the sole trade files a final return), your bank, insurers, and contracts get novated to the company.
- Set up the extraction pattern from day one — salary, dividends, pension.
Our promise We make money either way, so you get the straight answer: most sole traders under £40k who ask us about incorporating are told to stay put. When the numbers flip, we'll raise it before you do — that review is built into our Pro package.
