Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
The UK had around 5.7 million private sector businesses at the start of 2025, and 3.2 million of them (57%) were sole proprietorships, against 2.1 million actively trading companies (37%) [1]. Roughly 4.3 million businesses, or 75% of the total, have no employees other than the owner [1]. For most of them, the choice between trading as a sole trader and trading through a limited company is the single most consequential structural decision they make.
The calculation has shifted. From 6 April 2026, dividend tax rose to 10.75% at the basic rate and 35.75% at the higher rate [6], on top of the employer National Insurance rate of 15% that applies above a Secondary Threshold of £5,000 [20]. At the same time, Making Tax Digital for Income Tax began for sole traders and landlords with qualifying income above £50,000 [9]. Both structures now carry heavier obligations than they did a few years ago, and the old rule of thumb that "incorporation always saves tax" no longer holds by default.
This guide compares the two structures for the 2026-27 tax year. It covers legal liability, how each is taxed, worked examples at four profit levels, the payroll and reporting duties that come with each, and the point at which retaining profits inside a company changes the outcome.
Key takeaways
- A sole trader pays income tax plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above [7].
- A limited company pays corporation tax at 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between [4].
- Dividends above the £500 allowance are taxed at 10.75%, 35.75% or 39.35% from 6 April 2026 [6].
- When all profit is extracted, the 2026-27 rates leave a sole trader with more take-home pay than a one-person company at every profit level modelled in this guide.
- The company structure pays off mainly when profits are retained in the business, and through limited liability [2].
- A one-person company must run PAYE for its director and cannot claim Employment Allowance when the director is the only employee above the Secondary Threshold [16].
What separates a sole trader from a limited company
The two structures differ first in law, and only then in tax. A sole trader and the business are the same legal person. A limited company is a separate legal entity with its own tax affairs, its own bank account and its own filing obligations, owned by shareholders and run by directors [13].
Liability and legal identity
A sole trader has unlimited liability, which means the owner is personally responsible for every debt the business runs up [2]. Business insurance can reduce that exposure, but it does not remove it. A creditor of the business is a creditor of the individual.
A limited company ring-fences business debts inside the company. Directors carry legal duties in return: they must keep company records, prepare and file annual accounts, file the Company Tax Return and pay corporation tax [13]. A director who hires an accountant remains legally responsible for the company's records and accounts, and failures can lead to fines, prosecution or disqualification [13].
Setting up and ongoing admin
The set-up burden is lopsided. A sole trader can start trading straight away and must register for Self Assessment once trading income exceeds £1,000 in a tax year [2]. The deadline to notify HMRC is 5 October after the end of the tax year in which the business started, and late registration can trigger a penalty [14].
A company must be incorporated at Companies House. The digital incorporation fee rose to £100 and the digital confirmation statement fee to £50 from 1 February 2026 [10]. Identity verification became mandatory for new directors and persons with significant control from 18 November 2025 [21], and accounts filed with Companies House must be submitted through commercial software from 1 April 2028 [22].
The table below sets out the core structural differences.
| Feature | Sole trader | Limited company |
|---|---|---|
| Legal identity | Same as the owner | Separate legal entity |
| Liability for debts | Unlimited, personal | Limited to the company |
| Registration | Self Assessment with HMRC | Incorporation at Companies House (£100 online) |
| Profits taxed through | Income tax and Class 4 NI | Corporation tax, then PAYE and dividend tax |
| Public filing | None | Annual accounts and confirmation statement |
| Owner pay | Drawings (not a deductible cost) | Salary via PAYE plus dividends |
How a sole trader is taxed
A sole trader pays tax on profit, not on drawings. Whatever the owner withdraws, the taxable figure is turnover minus allowable expenses, assessed through Self Assessment [2].
Income tax on trading profits
Trading profit sits on top of any other income and is taxed at the standard income tax bands. In England, Wales and Northern Ireland, the Personal Allowance is £12,570, the basic rate is 20% up to £50,270, the higher rate is 40% up to £125,140 and the additional rate is 45% above that [8]. Scottish taxpayers use the Scottish bands, which include a 42% higher rate and a 48% top rate [8].
Once taxable income passes £100,000, the Personal Allowance is withdrawn at £1 for every £2 of income, which creates an effective 60% band between £100,000 and £125,140 [8]. A sole trader whose profits cross that line has no way of keeping the excess outside personal tax, whereas a company can retain it.
Class 4 and Class 2 National Insurance
Self-employed profits attract Class 4 National Insurance. For the 2026-27 tax year, the rate is 6% on profits between the Lower Profits Limit of £12,570 and the Upper Profits Limit of £50,270, and 2% above [7]. The Class 4 main rate was cut and the requirement to pay Class 2 was removed from 6 April 2024 [19].
Class 2 now survives only as a voluntary contribution. It costs £3.65 a week for the 2026-27 tax year, and self-employed people with profits below the Small Profits Threshold of £7,105 can pay it to protect their State Pension record [7]. The detail is set out in the guide to Class 2 National Insurance for the self-employed.
Payments on account and Making Tax Digital
Self Assessment also changes the timing of cash flow. Unless the previous year's bill was under £1,000, a sole trader makes two payments on account on 31 January and 31 July, each equal to half of the previous year's tax and Class 4 National Insurance, followed by a balancing payment [15]. In the second year of trading, this can mean paying one and a half years of tax in a single January.
Making Tax Digital for Income Tax applies to sole traders and landlords with qualifying income above £50,000 from 6 April 2026, above £30,000 from April 2027 and above £20,000 from April 2028 [9]. Qualifying income is gross turnover from self-employment and property, not profit, and HMRC estimates about 780,000 people join from April 2026 and around 970,000 more from April 2027 [9]. Those in scope must keep digital records and send quarterly updates through compatible software [9].
How a limited company and its director are taxed
A company introduces two layers of tax. Profit is taxed inside the company first, and the owner is then taxed again on what is drawn out as salary or dividends.
Corporation tax and marginal relief
Corporation tax is charged at the small profits rate of 19% on profits of £50,000 or less and the main rate of 25% on profits above £250,000 [4]. Between those limits, marginal relief tapers the effective rate, producing a marginal rate of 26.5% on each extra pound of profit in the band [5]. Both limits are reduced for short accounting periods and are divided by the number of associated companies [4].
The comparison below sets out the headline rates that apply to each structure.
| Tax | Sole trader rate | Limited company rate |
|---|---|---|
| Tax on profit | 20%, 40%, 45% income tax | 19% to 25% corporation tax |
| National Insurance on profit | 6% Class 4, then 2% | None on retained profit |
| Employer NI on owner salary | Not applicable | 15% above £5,000 |
| Tax on extraction | None (drawings are not taxed again) | Dividend tax 10.75%, 35.75%, 39.35% |
| Allowance on extraction | Not applicable | £500 dividend allowance |
Paying the director through PAYE
A director's salary is employment income. The company must operate PAYE, deduct income tax and Class 1 National Insurance, and report each payment to HMRC through Real Time Information [24]. Employers pay 15% employer National Insurance on earnings above the Secondary Threshold of £5,000 a year, while employees pay 8% above the Primary Threshold of £12,570 [20].
Directors are assessed for National Insurance on an annual earnings period even when paid monthly, which is a common source of error in one-person companies. A salary at or above the Lower Earnings Limit of £6,708 also builds a qualifying year for State Pension purposes, which is one reason many directors pay themselves at least that much [7]. The mechanics are covered in detail in the guide to company director payroll.
A single-director company cannot claim Employment Allowance when the director is the only employee paid above the Secondary Threshold [16]. The restriction does not apply once a second employee is paid above the threshold, at which point the allowance offsets up to £10,500 of employer National Insurance a year [23]. The edge cases are set out in the guide to Employment Allowance for limited companies.
Dividends and the higher dividend rates
Dividends can only be paid out of profits that remain after corporation tax. From 6 April 2026, dividends above the £500 dividend allowance are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band [6]. Dividend income that falls within an unused Personal Allowance is not taxed [6].
The rise in dividend rates carried a knock-on effect for director's loans. A director who borrows from the company must keep a director's loan account, and loans to participators left outstanding attract a corporation tax charge under section 455 [17]. That charge rose from 33.75% to 35.75% for loans made from 6 April 2026, mirroring the higher dividend rate [18].
Worked examples at four profit levels
The figures below compare a sole trader with a one-person limited company in England for the 2026-27 tax year. The company pays its director a salary of £12,570, which incurs £1,135.50 of employer National Insurance ((£12,570 minus £5,000) × 15%) because Employment Allowance is not available [16] [20]. Every remaining pound of post-tax profit is paid out as a dividend. Accountancy fees, pension contributions and other income are ignored.
Full extraction of profit
The sole trader column applies income tax and Class 4 National Insurance [8] [7]. The company column applies employer National Insurance, corporation tax with marginal relief, and dividend tax at the 2026-27 rates [5] [6].
| Profit before owner pay | Sole trader take-home | Company owner take-home | Difference |
|---|---|---|---|
| £30,000 | £25,468 | £24,403 | Sole trader +£1,065 |
| £50,000 | £40,268 | £38,862 | Sole trader +£1,406 |
| £75,000 | £54,811 | £53,404 | Sole trader +£1,407 |
| £100,000 | £69,311 | £65,210 | Sole trader +£4,101 |
At £50,000 of profit, the sole trader pays £7,486 of income tax and £2,245.80 of Class 4 National Insurance, a total of £9,731.80. The company pays £1,135.50 of employer National Insurance, £6,895.96 of corporation tax on £36,294.50 of taxable profit, and the director pays £3,106.59 of dividend tax on £29,398.54 of dividends, a total of £11,138.05. The combination of a 15% employer rate, no Employment Allowance and higher dividend rates removes the extraction advantage a one-person company once enjoyed.
When profits are retained in the company
The picture changes when the owner does not need every pound. Profit left inside the company is taxed at corporation tax rates only, while a sole trader pays income tax and Class 4 on all profit whether it is spent or not [4] [2].
Take £100,000 of profit where the director draws only enough dividend to stay within the basic rate band (£37,700 of dividends on top of the £12,570 salary). The company pays £1,135.50 of employer National Insurance and £19,118.04 of corporation tax, and the director pays £3,999 of dividend tax, a total of £24,252.54 [5] [6]. The remaining £29,476.46 stays in the company. The equivalent sole trader pays £30,688.60 on the same £100,000, so the company structure defers £6,436.06 of tax for as long as the cash stays in the business.
That deferral is the real argument for incorporation at higher profit levels. It funds equipment, working capital or a first hire from profit taxed at 19% to 26.5% rather than at 42% or more. When the retained cash is eventually paid out as dividends, it is taxed at the rates in force at that point.
Payroll and reporting duties side by side
The administrative gap between the two structures is wider than the tax gap. A sole trader with no staff has one annual return and, in scope of Making Tax Digital, quarterly updates [9]. A company carries a calendar of statutory deadlines from the day it is incorporated.
Annual deadlines
The table below compares the main recurring deadlines.
| Obligation | Sole trader | Limited company |
|---|---|---|
| Register with HMRC | Self Assessment by 5 October after the first tax year | Corporation tax and PAYE registration |
| Main tax return | Self Assessment by 31 January | Company Tax Return 12 months after period end |
| Tax payment | 31 January and 31 July | Corporation tax 9 months and 1 day after period end |
| Accounts | Not filed publicly | Companies House 9 months after year end (first: 21 months) |
| Payroll reporting | Only if staff are hired | FPS on or before every payday for the director |
The Self Assessment dates come from HMRC's payments on account rules [15] [14]. The company dates come from the Companies House and HMRC filing rules for private limited companies [11] [12]. Companies with taxable profits above £1.5 million pay corporation tax in instalments instead [12].
Running payroll in each structure
A limited company has a payroll from the first salary payment to its director. It must register as an employer, run PAYE, and send a Full Payment Submission on or before each payday, even when the only employee is the owner [24]. HMRC-recognised payroll for one-person businesses handles the annual director earnings period, the Lower Earnings Limit and the RTI submissions without manual workarounds.
A sole trader only needs a payroll once the first employee joins, at which point PAYE obligations are identical to those of a company [24]. The owner's own drawings never go through payroll. The process is set out step by step in the guide to employing staff as a sole trader, and businesses that only pay staff occasionally can produce an HMRC-compliant record with the instant payslip generator.
Choosing between the two structures
No single profit figure makes incorporation automatically worthwhile. The decision rests on a small set of variables that each business can test against its own numbers.
Factors that favour each structure
The table below summarises the circumstances in which each structure tends to fit.
| Circumstance | Tends to favour |
|---|---|
| Owner spends all profit each year | Sole trader |
| Profits regularly above the higher rate threshold and partly retained | Limited company |
| Significant business debt or contractual risk | Limited company |
| Minimal admin and privacy of accounts | Sole trader |
| Plans to bring in investors or co-owners | Limited company |
| Low or uncertain early-stage profits | Sole trader |
Liability protection can outweigh tax on its own. A business signing leases, supplier contracts or client agreements with significant exposure may choose a company even at modest profit levels because a sole trader's personal assets are on the line [2] [3].
Profit extraction strategy
A director who incorporates still has choices about how to take money out. Salary is deductible for corporation tax but carries employer and employee National Insurance above the thresholds, while dividends carry no National Insurance but are paid from taxed profit [20] [6]. Employer pension contributions are a third route that sits outside both income tax and National Insurance within the annual allowance.
The balance between these routes changes whenever rates move, which is why the mix is worth reviewing at the start of each tax year. The guide to director salary and dividends works through the common salary levels in detail. Accountants advising many owner-managed companies at once typically manage these reviews from a multi-client payroll dashboard so that salary changes flow straight into each client's RTI submissions.
Test a salary before incorporating
Before incorporating, an owner can model the director's salary with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross figure and shows the employer cost alongside take-home pay.
£ per month
e.g. 1257L, S1257L, BR, D0
S = Scotland · C = Wales · W1/M1 = non-cumulative
Enter a salary or hourly rate above
About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
The sole trader versus limited company question is no longer a tax question first. With employer National Insurance at 15%, Employment Allowance closed to single-director companies and dividend rates up by two percentage points, a one-person company that extracts all of its profit pays more tax than a sole trader at every level modelled here. The company structure earns its place through limited liability and through the ability to retain profit at corporation tax rates, not through a cheaper route to take-home pay.
The gap between the two structures is also narrowing on administration. Making Tax Digital brings quarterly digital reporting to sole traders over the £50,000, £30,000 and £20,000 thresholds in turn, while companies move to mandatory software filing at Companies House from 1 April 2028. Both paths are heading towards the same destination: continuous, software-driven reporting to HMRC, with payroll data flowing in real time rather than once a year.
Frequently asked questions
At what profit is a limited company better than a sole trader?
Under the 2026-27 rates, a one-person company that pays out all its profit leaves the owner with less take-home pay than a sole trader at £30,000, £50,000, £75,000 and £100,000 of profit [6] [4]. The company becomes more tax-efficient when part of the profit is retained in the business, particularly where the owner would otherwise pay higher rate income tax. Liability protection and investment plans can justify a company at any profit level.
Do sole traders have to use Making Tax Digital?
Sole traders and landlords with qualifying income above £50,000 must use Making Tax Digital for Income Tax from 6 April 2026 [9]. The threshold falls to £30,000 from April 2027 and £20,000 from April 2028. Qualifying income is gross turnover from self-employment and property, not profit, and those in scope must send quarterly updates using compatible software.
Does a one-person limited company need to run payroll?
A company that pays its director a salary must register as an employer, operate PAYE and report each payment to HMRC through Real Time Information [24]. Directors use an annual earnings period for National Insurance. A director who takes only dividends does not need a payroll, but loses the State Pension credit that a salary at or above the Lower Earnings Limit provides.
Can a sole trader switch to a limited company later?
A sole trader can incorporate at any point by registering a company at Companies House, which costs £100 online from 1 February 2026 [10]. The sole trade then ceases for Self Assessment purposes and the company takes over the business, its contracts and, where relevant, its employees. Many owners start as sole traders while profits are uncertain and incorporate once profits and retained cash justify the extra administration.
