Sole Trader or Limited Company: Which Is Better for Tax in 2026?
If you're starting a business or reviewing how you operate, one of the most common questions is sole trader or limited company: which is better for tax?
There's no one-size-fits-all answer. The most tax-efficient option in 2026 depends on your income level, how you want to take money out of the business, your appetite for admin, and your longer-term plans.
This guide explains the key differences to help you decide.
What's the Difference Between a Sole Trader and a Limited Company?
As a sole trader, you and your business are treated as the same legal entity. You keep the profits after tax, but you're also personally responsible for any debts.
A limited company is a separate legal entity. The company pays tax on its profits, and you're taxed separately on any money you take out, usually through a combination of salary and dividends.
Both structures are widely used in the UK, but they're taxed very differently.
Tax as a Sole Trader in 2026
As a sole trader, you pay Income Tax on your profits and National Insurance Contributions (NICs). All profits are taxed as personal income, regardless of whether you leave the money in the business or draw it out.
This structure is often attractive if:
- Your profits are relatively modest
- You want simplicity and minimal admin
- You're just starting out and testing an idea
However, as profits increase, sole traders can find themselves paying higher rates of Income Tax on all earnings, with limited scope to manage when tax is triggered.
Tax as a Limited Company in 2026
Limited companies pay Corporation Tax on their profits. Current Corporation Tax rates are:
- 19% for limited companies with profits less than £50,000
- Companies earning profits between £50,000-£250,000 are entitled to marginal relief, which reduces the tax from the main rate of 25%.
- 25% for limited companies with profits over £250,000
You then pay personal tax only on the money you extract from the company. Directors often take a small salary and the remainder as dividends, which are taxed differently from employment income.
While dividend and Corporation Tax rules are less generous than they once were, limited companies still offer greater control over how and when profits are taxed - something sole traders don't have access to. This flexibility can be particularly useful if profits are higher or earnings can be left in the business.
That said, limited companies do come with greater administrative responsibilities, including statutory accounts, Companies House filings, and more complex compliance.
Other Factors Beyond Tax
While tax is important, it shouldn't be the only consideration.
A limited company may be more suitable if you:
- want limited personal liability
- plan to reinvest profits
- are looking to grow, take on staff, or attract investment
- have clients who prefer dealing with incorporated businesses
On the other hand, sole trader status can be ideal if you:
- want simplicity
- have income that is lower or more variable
- are comfortable being personally responsible for the business
What's Changing in 2026 That Could Affect Your Decision?
When weighing up the sole trader or limited company routes, it's also worth being aware of a few upcoming changes that may influence how each structure feels in practice.
Making Tax Digital updates
From April 2026, many sole traders and landlords with higher levels of income will move into Making Tax Digital for Income Tax. This means keeping digital records and submitting quarterly updates to HMRC, rather than reporting everything just once a year. While tax payment deadlines remain the same, the compliance requirements will be more frequent.
Dividend tax rate increases
For limited companies, dividend tax rates are due to increase from April 2026. This may affect how tax-efficient dividends are compared with previous years and makes it even more important to plan how profits are extracted.
Separate filing for company accounts and tax returns
From April 2026, limited companies will also need to submit statutory accounts to Companies House and Corporation Tax returns to HMRC separately, rather than through a single joint filing process. While this doesn't change how much tax is paid, it does add an extra administrative step for company owners.
None of these changes automatically makes one structure “better” than the other, but they do underline the importance of reviewing your setup regularly and planning ahead.
So, Which Is Better for Tax in 2026?
In simple terms, lower profits and a preference for simplicity often favour sole trader status, while higher profits, personal asset protection and a need for flexibility can make a limited company more attractive.
However, the tipping point isn't the same for everyone. Small differences in profit levels, personal income, or how much money you need to withdraw from the business can significantly affect your overall tax position. It's also worth remembering that the “best” option can change over time. Many businesses start out as sole traders and incorporate later as profits grow or circumstances evolve.
Ultimately, choosing between a sole trader or a limited company isn't just about today's tax bill; it's about setting up a structure that supports your business both now and in the future.
Before deciding, it's worth getting tailored advice based on your expected profits, personal circumstances, and growth plans. The right structure can improve tax efficiency, reduce risk, and make compliance more manageable.
If you'd like help reviewing your options or understanding which structure makes the most sense for you in 2026, our team of experienced chartered accountants can provide clear, practical advice aligned with your business circumstances.
Please get in touch to speak with our team to explore the best approach for your situation.