Sole trader vs limited company: honest 2025/26 math.

Reform 1: Class 4 NIC cut to 6% (April 2024)

Class 4 NIC for self-employed dropped from 8% to 6% in April 2024 (with a further smaller cut in January 2024 from 9% to 8% if you include that). For a sole trader on £50k profit, that's a roughly £750 annual saving versus the pre-cut rate. Sole trader got materially cheaper.

Reform 2: Dividend allowance cut to £500 (April 2024)

The annual dividend allowance dropped from £1,000 (which itself was down from £2,000 the year before). For a Ltd extracting via salary plus dividends, this means more dividend tax paid on the same extraction. A higher-rate dividend taxpayer loses an extra £169 of dividend allowance to tax (33.75% on the £500 cut).

Reform 3: Employer NIC hike (April 2025)

The big one. Two changes hit at once:

• Employer Class 1 NIC rate rose from 13.8% to 15%
• Secondary threshold dropped from £9,100 to £5,000
• Employment Allowance rose from £5,000 to £10,500 (helps multi-employee Ltds; single-director Ltds cannot claim it)

For a single-director Ltd paying themselves £12,570 salary (the optimal level to use the Personal Allowance), employer NIC went from £484 to £1,135. That's an extra £651 of cost just from this one change.

How you're taxed

• Income Tax on net profit at the standard rates (20% basic, 40% higher, 45% additional, 60% effective rate in the £100k to £125,140 PA-taper zone)
• Class 4 NIC at 6% on profits between £12,570 and £50,270, then 2% above
• Class 2 NIC effectively abolished from April 2024; auto-credited if profits above £6,725, no payment
• Personal Allowance £12,570 (frozen until April 2028)

Admin reality

• Register for Self Assessment by 5 October following the tax year you started
• One annual SA100 return per year, due 31 January following the tax year
• Two payment dates: 31 January (balancing payment + first POA) and 31 July (second POA)
• Records kept for 5 years from 31 January following the relevant tax year
• From April 2026 if your qualifying income exceeds £50k: MTD ITSA quarterly updates, plus EOPS, plus Final Declaration. See our MTD ITSA guide

When sole trader makes sense

• Profit under £30,000 (almost always sole trader)
• Single-owner business, you draw all the profit
• Low liability work (creative, professional services, freelance)
• Want simplicity above all
• You're testing a new business idea

Two-stage taxation

Stage 1, at company level: Corporation Tax on profit (after deductible salary and other expenses):

• Small Profits Rate 19% on profits up to £50,000
• Marginal relief tapers from 19% to 25% between £50,000 and £250,000 (effective marginal rate 26.5% in this band)
• Main Rate 25% on profits above £250,000

Stage 2, at personal level (when you extract):

• Salary: Income Tax + Class 1 NIC (employee + employer); salary is deductible against CT
• Dividends: £500 allowance free, then 8.75% (basic), 33.75% (higher), 39.35% (additional)

Optimal extraction strategy for a single-director Ltd

Two main options for the salary level:

Admin reality

• Companies House: incorporation (£50 standard / £78 same-day), annual confirmation statement (£34 online), annual accounts (filing fee included), all directors and PSCs identity-verified under ECCTA 2023
• HMRC: Corporation Tax registration, CT600 within 12 months of period end, CT payment within 9 months and 1 day, PAYE if salary, VAT if turnover over £90k
• Personal: directors still file SA100 if total income requires it
• Bookkeeping: stricter separation of business and personal finances; cannot just withdraw cash

Notes: All Ltd calculations assume single-director, salary at £12,570 PA, dividend extraction of all post-CT profit, no Employment Allowance available. Accountancy fee is illustrative; ours is fixed-fee, quoted at the free 15-min call. Sole trader figures exclude any expense increase from MTD ITSA digital software (typically £15-£30/month if Phase 1 applies).

The process

1. Day 1-2: Incorporate the company. File at Companies House (£50 standard / £78 same-day). Choose name, registered office, director (you), share structure (typically 100 shares of £1 each, all owned by you initially). Identity verification under ECCTA is now mandatory; we coordinate via our ACSP partner if needed.
2. Day 3-5: Open a business bank account. Most challenger banks (Tide, Starling, Mettle) approve in days. High street banks slower.
3. Day 5-7: Register with HMRC. Corporation Tax registration (within 3 months of starting trading), PAYE if salary, VAT if turnover over £90k, identity verify the directors with Companies House for the personal code.
4. Day 7-10: Notify clients and suppliers. Reissue invoices under the new company. Novate ongoing contracts where possible. Update bank details.
5. Day 10-14: Close down sole trader Self Assessment. File a final SA100 covering the period to the cut-over date. Tell HMRC you've ceased self-employment.

Cost

• Companies House: £50 standard (£78 same-day)
• Identity verification: free direct, £30-£100 via ACSP
• Accountant project work for the switch: £150-£500 typical
• Ongoing accounting for a Ltd: typically £100-£200/month vs £85/month for sole trader monthly accounting

We do the whole switch as a fixed-fee package: £199 covers incorporation, articles, share structure, identity verification coordination, HMRC registrations and the cessation paperwork for your sole trader case. See Limited Company Formation.

When to time it

Best: 5 April / 6 April cut-over (start of new tax year, clean break). Second best: your accounting year end (avoids stub-period accounts). Avoid mid-year switches; they double your accounting fees for the year because you need a final sole trader return AND a partial-year Ltd accounts set.

What we do

• Free 15-min scoping call with a chartered accountant. We take your specific numbers and run both structures honestly. If sole trader is the right answer, we'll tell you.
• Sole trader services: Self Assessment from £180 fixed fee, monthly accounting from £85/month including MTD ITSA quarterly submissions where applicable. See Self-Assessment & Personal Tax.
• Limited Company Formation: £199 fixed fee end-to-end including identity verification coordination and HMRC registrations. See Limited Company Formation.
• Ongoing Ltd accounting: from £100/month for a single-director small Ltd; quoted at the scoping call. Includes annual accounts, CT600, confirmation statement, payroll, director SA100, MTD VAT (if applicable), all HMRC correspondence.
• Tax planning advisory for the borderline cases (60% PA-taper trap, large pension planning, multi-director income splits, exit prep). See Tax Planning Advisory.
• Switching accountants handled end to end, free, in 2-3 weeks. See Switching Accountants.