Sole trader vs limited company: when does incorporation pay off in 2026/27?
·7 min read
The old rule of thumb — "incorporate above £25k profit" — hasn't been true for a while. Three things moved the needle: the dividend allowance shrinking to £500, dividend tax going up, and the 2025 increase to employer NI. For 2026/27 the answer is closer to £35,000–£45,000 of trading profit, depending on extraction.
The four levers
- Director salary — £12,570 (full PA) vs £9,100 (no employer NI) vs £5,000 (custom)
- Extraction — full extraction this year, or retain in the company
- Employment Allowance — eligible single-director companies cannot claim it
- Annual cost — accountancy + Confirmation Statement, typically £900–£1,800
Worked example — £40,000 profit, full extraction
- Sole trader: income tax + Class 4 NIC ≈ £6,486 take-home £33,514
- Limited company at £12,570 salary, dividend the rest, no employer NI:
- Salary £12,570 (no PAYE, no NI) → in PA
- Profit after salary £27,430 → CT @ 19% = £5,212
- Dividend £22,218; tax after £500 allowance ≈ £1,891
- Plus annual cost £1,200
- Take-home ≈ £32,485
At £40,000 the sole trader is still ahead by ~£1,000. Run the same model at £55,000 and the limited company wins by roughly £1,200.
The framework I'd give a client
- Below £35k profit — almost always sole trader
- £35k–£50k — depends on extraction, run the model
- Above £50k with retention — limited company
- Above £100k — limited company unless personal allowance taper changes the math
Two things people forget: the cost of running the company is real, and retained profits are only valuable if the client actually leaves them in the company.
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Sole Trader vs Ltd
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FAQs
- Is there a single profit level that triggers incorporation?
- No. The crossover depends on the director's salary chosen, whether profits are extracted in full, employer NI eligibility, and the cost of running the company. Use a model.
- What changed for 2026/27?
- Higher employer NI and lower secondary thresholds (from April 2025) have eaten into the saving. Dividend tax is unchanged. The result is a higher crossover than the £25k figure that used to circulate.