Introduction – Why More Sole Traders Are Looking at Limited Company Status
For many business owners, the question isn’t “Should I go limited?” anymore — it’s “When should I go limited?”
With tax thresholds frozen, National Insurance still hitting sole traders harder than most people realise, and MTDITSA on the horizon creating six submissions a year instead of one, more and more business owners are realising that incorporation isn’t just a paperwork change — it’s a tax strategy.
But here’s the important truth:
You don’t automatically save tax when you go limited.
It depends on your profit level, how you withdraw money from the business, and whether you get the right structure in place.
That’s where working with an accountant before the switch — not after — makes the difference.
In this blog, we break down exactly how the tax works for sole traders vs limited companies, using real-world examples and profit levels of £25k, £45k and £65k, so you can clearly see when and how incorporation turns into a financial advantage.
And throughout, we’ll show how Accounting Matters helps business owners structure things correctly — because good tax planning is what turns “going limited” from a formality into a financial benefit.
How Sole Traders Are Taxed (The Current Reality)
A sole trader pays Income Tax + Class 2 NI + Class 4 NI on everything they earn.
There is no separation between you and your business.
Your profit is your income.
Income Tax (sole trader)
Band |
Rate |
Up to £12,570 |
0% |
£12,571 – £50,270 |
20% |
£50,271 – £125,140 |
40% |
National Insurance (sole trader)
Type |
Rate |
Class 2 |
£3.45 per week |
Class 4 |
6% on profits from £12,570 to £50,270, then 2% thereafter |
So once a sole trader passes roughly £30k–£35k profit, the combination of tax + NI begins to “bite” — even before they reach the higher-rate threshold.
How Limited Companies Are Taxed (Structured and Flexible)
Limited companies are taxed very differently.
The COMPANY pays Corporation Tax on its profit.
The DIRECTOR then chooses how to extract their income (salary, dividends, pension, or retained profit).
Corporation Tax Rates
Profit |
CT Rate |
£0–£50k |
19% |
£50k–£250k |
marginal band, blended rate |
£250k+ |
25% |
Directors typically pay:
Income Type |
Personal Tax Treatment |
Salary |
PAYE (but usually set at NI threshold) |
Dividends |
8.75% (basic) / 33.75% (higher) / 39.35% (additional) |
Company pension contributions |
Usually tax-deductible for the company |
This is where structure matters — and where Accounting Matters helps clients maximise the outcome.
Tax Comparison 1 – Profit £25,000
At this level, incorporation may not yet be beneficial.
|
Sole Trader |
Limited Company |
Profit |
£25,000 |
£25,000 |
Income Tax |
~£2,492 |
Salary low → minimal PAYE |
NI |
~£1,146 |
None personally (dividend route) |
Corporation Tax |
n/a |
~£2,500 |
Total Tax |
~£3,638 |
~£2,500 (but then dividends taxed) |
Net Take-Home |
similar |
similar |
Summary: No major advantage at this level — unless you want liability protection or are preparing for growth.
This is exactly where Accounting Matters would advise a “switch soon” strategy rather than switching immediately — so that you incorporate just before the tax tipping point.
Tax Comparison 2 – Profit £45,000
This is where limited company status often starts to pull ahead.
|
Sole Trader |
Limited Company |
Profit |
£45,000 |
£45,000 |
Income Tax |
~£6,492 |
Salary small → tax minimal |
NI |
~£2,046 |
NI avoided |
Corp Tax |
n/a |
~£8,550 (before dividends) |
Dividends Tax |
n/a |
~£2,400 (depending on extraction) |
TOTAL TAX |
~£8,538 |
~£6,000–£6,400 |
SAVING: Around £2,000–£2,500 per year.
This is the FIRST meaningful tipping point — and exactly where Accounting Matters would recommend switching, because this level of profit means incorporation is now financially beneficial, not just administratively tidy.
Tax Comparison 3 – Profit £65,000
Here the difference becomes significant.
|
Sole Trader |
Limited Company |
Profit |
£65,000 |
£65,000 |
Income Tax |
Higher rate begins → ~£14,292 |
Dividend mix keeps below higher-rate quickly |
NI |
~£2,446 |
NI avoided |
Corp Tax |
n/a |
~£12,350 |
Div Tax |
n/a |
~£4,000 |
TOTAL TAX |
~£16,738 |
~£13,500–£14,300 |
SAVING: £2,500–£3,200+ per year
At this profit level, not incorporating means voluntarily overpaying HMRC.
At £65k profit, a sole trader is in early higher-rate tax.
A limited company can still keep tax mostly at basic-rate levels using structured salary/dividends.
And this is BEFORE:
Pensions
Spouse/family shareholding
Profit retention
are factored in — all of which improve the position further.
Visual Timeline: When Does It Start to Matter?
Profit Level |
Tax Outcome |
Accounting Matters Advice |
£0–£30k |
Limited advantage |
Monitor & plan |
£30k–£50k |
Savings begin |
Start the switch |
£50k+ |
Strong tax advantage |
Incorporate |
How Pensions Supercharge the Tax Savings
One of the biggest advantages of being a limited company director is the ability to make employer pension contributions directly from the company.
This is powerful because:
As a Sole Trader |
As a Ltd Company Director |
Contributions come from personal income (after tax + NI) |
Contributions come from the company (before tax) |
No reduction to taxable profits |
Reduces corporation tax |
Limited planning options |
Strategic tax planning tool |
Example:
If your company contributes £10,000 into your pension:
- You personally don’t pay tax on it
- The company reduces its corporation tax bill
- You keep the £10k in your wealth pot instead of handing a % to HMRC
- It’s effectively part of your income without triggering dividend or NI
This is where Accounting Matters helps clients create director remuneration strategies, not just bookkeeping.
Income Splitting – Another Advantage Sole Traders Don’t Have
As a sole trader, your income is YOUR income.
You can’t share profit with a spouse unless they are genuinely working for the business and you put them on payroll.
But with a limited company:
A spouse / civil partner can hold shares
They can receive dividends taxed at their lower rate
You legally shift income into the lower tax bracket
Example:
If your spouse has no other income:
- They can receive £12,570 as tax-free allowance
- Then dividends at just 8.75%
This alone can save thousands per year for family-run businesses.
Income splitting is one of the most underused tax strategies — and one that Accounting Matters helps clients structure correctly from day one.
Retained Profits = Long-Term Wealth
As a sole trader, every penny of your profit is treated as personal income for tax purposes.
As a company?
You choose how much to withdraw.
You can:
- Leave profits in the business
- Pay lower corp tax on them
- Reinvest in growth
- Draw them in a later tax year when more efficient
This allows strategic timing — a key benefit sole traders simply do not have.
For example:
If you have a strong year, you can leave some profit in the company, then extract it in a later year where your personal income is lower, reducing tax.
Accounting Matters advises clients on profit extraction timing, something most “basic” accountants don’t actively plan for.
How MTDITSA Makes Staying Sole Trader Less Efficient
From April 2026, MTDITSA will require:
- Quarterly submissions
- Digital record-keeping
- An End of Period Statement
- A Final Declaration
This means six tax filings per year instead of one.
For many sole traders, this means:
❌ More admin
❌ More deadlines
❌ More cost
❌ More risk of penalties
Meanwhile…
Limited companies already operate in a structured digital environment:
✔ Annual accounts
✔ Corporation tax return
✔ Payroll
✔ Already set up on digital systems
So the “extra admin burden” that used to make people hesitate about incorporating?
That gap is disappearing.
The compliance workload for a sole trader is about to look a LOT like that of a limited company — just with fewer tax advantages.
Why Accounting Matters Makes the Difference
Going limited is easy.
Going limited correctly and tax-efficiently is where most people go wrong.
We don’t just “create a company.”
We create a company structured for tax optimisation.
What we put in place:
Service |
Why it matters |
Director salary/dividend strategy |
Minimises tax + NI |
Shareholdings (including spouse) |
Enables lower-rate extraction |
Pension strategy |
Diverts profit into wealth instead of HMRC |
Digital bookkeeping setup |
Keeps you MTD-compliant from day one |
Quarterly reviews |
Avoids year-end surprises |
Tax forecasting |
Stops cash flow shocks |
HMRC handling |
Peace of mind |
This isn’t just switching status — it’s switching strategy.
The Real Picture: Before & After
Profit |
Sole Trader Take-Home |
Ltd Company Take-Home |
£25,000 |
~Similar |
~Similar |
£45,000 |
Noticeably lower |
~£2k–£2.5k better |
£65,000 |
Higher rate tax bites |
£2.5k–£3.2k+ better |
Add a spouse shareholder?
Savings increase.
Add pension strategy?
Savings increase further.
Retain profits strategically?
Savings compound.
This is why incorporation isn’t a “threshold event” — it’s a strategy switch.
Conclusion — The Tipping Point Is Here
Tax alone isn’t the only reason people incorporate — but it is often the reason they finally act.
At around £40k–£50k profit, the maths starts working clearly in favour of a limited company.
At £60k+, staying a sole trader is simply costing money unnecessarily.
And with MTDITSA coming, the admin excuse no longer holds.
Lower tax
More flexibility
Better long-term planning
Strategic compensation options
Family tax planning
Profit retention
Future-proofing
The question is no longer “Should I?”
It’s “When?”
Next Step: Speak to Us
If you’re approaching or already above that £40k–50k mark, now is the perfect time to plan the switch before MTDITSA lands.
At Accounting Matters, we’ll:
- Review your numbers
- Show you your tax saving in black-and-white
- Handle the full incorporation for you
- Put a tailored remuneration strategy in place
- Keep you compliant going forward
📞 01773 747990
📧 welcome@accountingmatters.co.uk
🌐 https://www.accountingmatters.co.uk