Self-Employed vs Limited Company: Tax & Take-Home Compared
Should you stay self-employed (sole trader) or set up a limited company? This guide compares tax, take-home pay, and admin so you can make an informed choice.
Last updated: April 2026
The Key Decision
When you work for yourself in the UK, you can operate as either a sole trader (self-employed) or through a limited company. Both are legitimate ways to run a business, but they're taxed very differently.
The right choice depends on your income level, how you want to be paid, and how much admin you're willing to handle. There's no one-size-fits-all answer – but for many people, there's a clear "crossover point" where one becomes more tax-efficient than the other.
Self-Employed (Sole Trader)
You and your business are the same legal entity. Profits are taxed as your personal income via Income Tax and National Insurance.
Limited Company
Your company is a separate legal entity. It pays Corporation Tax on profits, and you pay tax on what you extract via salary and dividends.
Head-to-Head Comparison
| Factor | Self-Employed | Limited Company |
|---|---|---|
| Tax on profits | Income Tax (20-45%) + Class 4 NI | Corporation Tax (19-25%) |
| Tax on taking money out | None – profits are yours | PAYE on salary + Dividend Tax |
| National Insurance | Class 4 (6%/2%) — Class 2 voluntary (£3.65/week) | Employer's NI (15%) + Employee's NI on salary |
| Tax-free allowance on profits | Personal Allowance (£12,570) | Personal Allowance + £500 Dividend Allowance |
| Admin burden | Lower – Self Assessment only | Higher – accounts, returns, payroll |
| Accountant costs | £150-400/year (optional) | £1,000-2,500+/year (often essential) |
| Personal liability | Unlimited personal liability | Limited to company assets |
| Privacy | Private financial affairs | Public accounts at Companies House |
| Best for | Lower income, simplicity | Higher income, tax planning |
When Self-Employed Makes Sense
Staying self-employed is often the better choice if:
Your profits are under £30,000-40,000 – the tax savings from a limited company are unlikely to outweigh the extra costs and hassle.
You value simplicity – one Self Assessment tax return per year is far simpler than company accounts, Corporation Tax, and payroll.
You want instant access to cash – your profits are yours immediately, with no need to "extract" money from a company.
You're just starting out – beginning as self-employed lets you test the waters before committing to company formation.
You prefer privacy – your finances stay between you and HMRC, with no public records at Companies House.
When a Limited Company Makes Sense
A limited company becomes more attractive when:
Your profits exceed £40,000-50,000 – the tax savings start to become meaningful, often £2,000-5,000+ per year.
You can leave profits in the company – if you don't need all your earnings immediately, you only pay Corporation Tax (not Income Tax) on retained profits.
You want limited liability – a company protects your personal assets if the business fails (with some exceptions for personal guarantees).
You want to make pension contributions – employer pension contributions from your company are tax-deductible and efficient.
You're in a higher-risk industry – the liability protection can be valuable for consultants, contractors, and service providers.
You have a spouse on a lower income – dividends can be paid to shareholder spouses, potentially saving tax (though anti-avoidance rules apply).
Worked Example: £60,000 Profit
Let's compare both structures for someone making £60,000 in business profit (2026/27 rates):
Self-Employed
Class 2 NI is no longer charged automatically — voluntary contributions (£3.65/week) are available to protect State Pension credits.
Limited Company
Employer NI at 15% on salary above £5,000 secondary threshold
The Verdict
At £60,000 profit with 2026/27 rates, the self-employed structure provides roughly £1,520 more take-home pay when all costs are included. The limited company becomes more attractive at higher profit levels — at £80,000+ the tax savings from dividends typically outweigh the employer NI and accountant costs. The crossover point has shifted upward due to the April 2026 dividend tax rate increases.
Important Considerations
IR35 and "off-payroll" rules
If you work like an employee (e.g., one main client, set hours, their equipment), IR35 rules may apply – meaning you lose most tax advantages of a limited company.
Dividend tax has increased again
The dividend allowance has shrunk to £500 (from £2,000 in 2022/23). Additionally, dividend tax rates increased from 6 April 2026 — the basic rate rose to 10.75% (from 8.75%) and the higher rate to 35.75% (from 33.75%). This further narrows the tax advantage of extracting profits as dividends versus salary.
Mortgage applications can be harder
Some lenders are less flexible with limited company directors, especially if you retain profits rather than paying yourself a high salary.
Making Tax Digital: a new compliance difference from April 2026
From 6 April 2026, sole traders and landlords with gross income over £50,000 must keep digital records and submit quarterly income summaries to HMRC — not just an annual Self Assessment return. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028. Limited companies have their own MTD for Corporation Tax timeline, expected from 2026 onwards.
If your income is approaching the £50,000 threshold as a sole trader, this is a meaningful additional compliance consideration — factor in the cost of MTD-compatible accounting software (typically £20–£40/month).
Frequently Asked Questions
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