The old rule of thumb — incorporate past £30,000 of profit — no longer holds. Three changes have reversed it, and the last one landed in April 2026.
What changed
- Employer National Insurance is 15% with a £5,000 threshold. A director on a £12,570 salary now costs the company £1,136 in employer NI.
- Corporation tax bites at 26.5% at the margin between £50,000 and £250,000, not the 25% headline, because marginal relief is clawed back as profits rise.
- Dividend rates rose 2 points on 6 April 2026 to 10.75% and 35.75%.
The arithmetic that surprises people
Take the next pound of profit out of a company sitting in the marginal corporation tax band:
- 26.5% goes in corporation tax.
- Of the 73.5% left, 35.75% goes in dividend tax.
- Combined: 52.78%.
A higher rate sole trader pays 40% income tax plus 2% Class 4 National Insurance — 42%.
So if you draw everything, the company is now the more expensive route at most profit levels. That is the opposite of the received wisdom.
| Profit | Sole trader keeps | Company keeps | Company advantage |
|---|---|---|---|
| £30,000 | £25,468 | £24,403 | −£1,065 |
| £50,000 | £40,268 | £38,862 | −£1,406 |
| £60,000 | £46,111 | £46,091 | −£20 |
| £80,000 | £57,711 | £55,765 | −£1,947 |
| £100,000 | £69,311 | £65,210 | −£4,102 |
| £150,000 | £92,040 | £86,759 | −£5,281 |
Where the company still wins
You do not need all the profit
This is the real answer. Profit left in the company has borne corporation tax but no dividend tax, and that second layer is deferred — until a year when your income is lower, or spread across two tax years, or taken as capital on winding up. A sole trader has no choice: every pound of profit is taxed in the year it is earned, spent or not.
If your business earns £100,000 and you live on £45,000, the company is comfortably ahead. If you need every penny, it is not.
Company pension contributions
A company can pay into your pension as an allowable business expense — no corporation tax, no income tax, no National Insurance, and not limited by your salary. For many one-person companies this is the single most efficient way to extract value, and it is not reflected in the headline comparison above.
Limited liability
A company is a separate legal person. A sole trader is personally liable for every business debt, without limit. If your work carries real risk — construction, anything with employees, anything where a claim could exceed your insurance — this can outweigh every tax point on this page.
Perception and contracts
Some clients will only contract with limited companies. Others require it for insurance or procurement reasons. That is not a tax argument, but it is often the deciding one.
The Employment Allowance trap
The Employment Allowance is worth up to £10,500 of employer National Insurance — but a company whose only employee is also a director cannot claim it. Most one-person companies pay employer NI in full.
A great many comparison tools apply the allowance anyway, which overstates the case for incorporating by more than a thousand pounds. Our calculator lets you toggle it and see the difference .
The costs of being a company
- Accountancy fees of typically £900–£2,000 a year, against £250–£600 for a sole trader return.
- Statutory accounts, a confirmation statement and a corporation tax return every year.
- PAYE registration and monthly RTI submissions, even for a single director.
- Your accounts and registered address publicly visible at Companies House.
- A cost to close: striking off or liquidation, each with its own fees and tax treatment.
A £900 tax saving that costs £1,200 in fees is not a saving.
IR35
If you work through a company for what is effectively one client, the off-payroll working rules may treat you as an employee for tax. Since April 2021 medium and large private sector clients make that determination themselves. If you are caught, the tax advantages of the company largely disappear while the admin remains. Assess this before incorporating, not after.
So what should I do?
Run your own numbers rather than trusting a threshold. Then ask three questions the calculator cannot answer: do I need all the profit each year, do I need limited liability, and will IR35 apply? Those usually decide it.
Incorporating is difficult to unwind and interacts with IR35, VAT, pensions and your personal circumstances. This guide is information, not advice — speak to an accountant before deciding.