Whether to trade as a sole trader or a limited company usually comes down to intent, not tax. At around £35,000 of profit, if you're drawing everything out to live on, staying a sole trader can actually cost you less. The real reasons to incorporate are limited liability, keeping profit in the business, and credibility — none of which are about the tax bill.
Here's the straight answer, and where it flips.
The tax maths at a modest profit
At about £35,000 of profit, fully extracted, going limited can cost you roughly £1,150 a year more in tax than staying a sole trader — before you've paid for the extra accounting a company needs. This April's increase to dividend tax rates tilted that comparison a little further against incorporating for tax alone.
So if the whole reason you're considering a company is "I'll pay less tax", at that profit level and drawing it all, the maths often points the other way.
The real reasons to incorporate
The case for a limited company is real — it's just not primarily a tax case. Three reasons carry it.
Protection. A limited company is its own legal entity, so if it can't pay a debt or ends up in a dispute, that sits with the company rather than with you personally. As a sole trader, you and the business are the same thing in law. The bigger the contracts you take on, the more that separation is worth.
Keeping profit in the business. If you don't need all the profit to live on, the company pays 19-25% corporation tax on what stays in, and you decide when to draw the rest. That leaves more in the business to reinvest, or adjust the timing of when you take it out.
Credibility. Some larger clients and platforms won't contract with a sole trader — they want a limited company on the invoice. If that's your market, incorporating opens doors the tax maths can't measure.
There can be other benefits to incorporate, depending on your situation.
So which should you choose?
Match the structure to what you're building. Drawing everything out at a modest profit, a sole trader usually wins on the numbers. Building something bigger, wanting to protect your own assets, keep money in to grow, or work with clients who expect a company — the limited company earns its keep. Decide on those reasons, and the tax follows.
Frequently asked questions
Is a sole trader or limited company better? At around £35,000 of profit, fully drawn, a sole trader can cost less in tax. A limited company wins when you want liability protection, to retain profit at 19% corporation tax, or credibility with clients who contract company-to-company.
How much more does going limited cost at £35k? Roughly £1,150 a year more in tax when you're extracting all the profit, before the extra accounting a company needs — on 2026/27 figures.
When is it worth incorporating? When the non-tax reasons apply: you want to protect personal assets, keep profit in the business, or work with clients who require a limited company.
Work with us
This is a decision worth getting right for your own numbers and plans. Book a call with Carr Accounting Studio and we'll talk it through for your situation.
Or start with the free FounderTax check — it opens with exactly this question.
General information, not advice. UK figures 2026/27, illustrative example — they change, and your situation may differ. Written by David Carr, chartered accountant and founder of Carr Accounting Studio.