At what profit does a limited company actually start to pay off?

There is no single crossover figure, because it depends far more on what you do with the profit than on how much of it there is. If you extract everything, the worked example above shows a sole trader ahead by roughly £870 at £70,000 of profit under 2026/27 rates, and the gap only closes slowly as profits rise. If you retain profit to reinvest, a company is ahead almost immediately for a higher rate taxpayer, because retained profit is taxed at 19% or a marginal 26.5% rather than 42%. Ask yourself how much you will leave in the business over the next year before you ask what your turnover is.

Can a one-person company claim the £10,500 Employment Allowance?

No. The Employment Allowance is worth £10,500 against employer National Insurance for 2026/27, but HMRC's eligibility rules exclude the most common small company set-up: if your company has only one director, that director must not be the only employee liable for secondary Class 1 National Insurance. A single-director, no-staff company therefore pays employer NI in full, which is why the £1,136 charge appears in the worked example above. Take on one employee paid above the £5,000 secondary threshold and the position changes. This catches out a lot of new directors who budgeted on the allowance being available.

Does incorporating really protect my house?

It protects it from ordinary trading debts, which is the point of limited liability, but it is not a shield against everything. Three things routinely cut through it. Personal guarantees, which most lenders and many commercial landlords will ask a small company's director to sign, put your own assets back on the line for that specific debt. Wrongful trading — continuing to trade when you knew, or should have known, there was no reasonable prospect of avoiding insolvency — can make a director personally liable. And your own negligence or fraud is never covered. Incorporation limits routine commercial risk; it does not license careless trading.

Do I have to pay myself a salary from my own company?

There is no legal requirement to, and some directors take dividends only. Two things argue for a salary anyway. It is a deductible expense for the company, so it reduces Corporation Tax in a way a dividend does not. And earnings at or above the relevant National Insurance threshold protect your entitlement to the state pension and contributory benefits for that year, which dividends do nothing for. Running a salary means registering as an employer and operating PAYE, with real-time submissions each pay period. Most one-person companies conclude the paperwork is worth it, but it is a decision to make deliberately rather than by default.

What actually happens to my sole trader business when I incorporate?

Legally the sole trader business ceases and a new company starts trading, which has several practical consequences. You file a final Self Assessment return covering the period to cessation. Business assets — equipment, vehicles, stock, goodwill — pass to the company, and that transfer is itself a taxable event, though incorporation relief can defer a gain where the whole business goes across in exchange for shares. Your VAT registration does not follow automatically; you either register the company afresh or apply to transfer the existing number. Contracts, bank accounts, insurance and any licences all need to be reissued in the company's name, not simply carried over.

Can I go back to being a sole trader if incorporating was a mistake?

Yes, but it is more involved than the move in. You stop trading through the company, settle its liabilities, extract any remaining value — which may be taxed as a distribution — and then either strike the company off or place it into a members' voluntary liquidation, depending on how much is left in it. Extracting reserves on a wind-up can be taxed as capital rather than income where the conditions are met, which is why the order of events matters and why this is worth planning rather than improvising. Disincorporating is entirely possible; it is simply not free, which is the argument for choosing deliberately at the start.

Sole Trader vs Limited Company: What Changes

The core difference: legal identity

As a sole trader, you and the business are legally the same thing. There's no separation — you trade under your own name (or a trading name), and the business's income is simply your income. A limited company, by contrast, is its own legal entity, separate from you personally. It can own assets, enter contracts and owe debts in its own right. You run it as a director, and if you own shares, you're also a shareholder — but the company itself is a distinct legal "person."

Liability

This is usually the single biggest factor in the decision. As a sole trader, there's no legal separation between your personal and business finances — if the business runs into debt it can't pay, your personal assets are, in principle, exposed. With a limited company, your liability is generally limited to what you've invested in shares (hence the name), because the company is a separate legal entity from you. That protection isn't absolute — directors can still be personally liable in certain circumstances, such as personal guarantees on loans, or wrongful trading — but the general principle of limited liability is the main structural reason people incorporate.

Tax treatment: the actual 2026/27 numbers

As a sole trader, all your business profit is treated as your personal income and taxed through Self Assessment via Income Tax and National Insurance, regardless of how much of it you actually draw out of the business to live on. For 2026/27 in England, Wales and Northern Ireland that means a personal allowance of £12,570, then 20% on income up to £50,270, 40% up to £125,140 and 45% above that. The personal allowance is withdrawn by £1 for every £2 of income over £100,000, so it is gone entirely at £125,140. On top of Income Tax you pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% on everything above. Class 2 National Insurance is £3.65 a week for 2026/27, but where your profits are £7,105 or more it is treated as paid for you and does not appear as a bill.

A limited company pays Corporation Tax on its profits first. The small profits rate is 19% on profits up to £50,000 and the main rate is 25% on profits over £250,000, with marginal relief in between. Marginal relief is not a middle rate — it produces an effective marginal rate of 26.5% on every pound of profit between £50,000 and £250,000, which is the number that actually matters when you are deciding whether to earn one more pound inside the company.

Then you are taxed again personally on whatever you take out, usually as a mix of salary and dividends. Salary is a deductible cost for the company but attracts employer National Insurance at 15% on pay above the £5,000-a-year secondary threshold. Dividends are paid from profit that has already borne Corporation Tax, and from 6 April 2026 the dividend rates rose by two percentage points to 10.75% for basic rate taxpayers and 35.75% for higher rate, with the additional rate unchanged at 39.35%. The dividend allowance stays at £500. That April 2026 increase matters more than most comparisons written before it admit, and the worked example below shows why.

A worked example: £70,000 of profit

The following is illustrative, not a quote. Assume one owner, no other income, England/Wales/NI rates for 2026/27, £70,000 of trading profit before any owner's pay, and that the owner wants all of it in their own bank account by the year end.

As a sole trader. Income Tax is £7,540 on the basic rate band (£37,700 at 20%) plus £7,892 on the £19,730 that falls into higher rate (at 40%), giving £15,432. Class 4 National Insurance adds £2,262 (6% on £37,700) plus £395 (2% on £19,730), giving £2,657. Total tax and NI: £18,089, leaving £51,911.

As a limited company, taking a £12,570 salary and the rest as dividends. Employer National Insurance on the salary is £1,136 (15% on the £7,570 above the £5,000 threshold). That leaves £56,295 of company profit, on which Corporation Tax with marginal relief is £11,168. The £45,126 left over is paid out as dividends. The salary uses the personal allowance, so £37,700 of dividends sit in the basic rate band — £500 covered by the dividend allowance and £37,200 taxed at 10.75%, or £3,999 — and the remaining £7,426 is taxed at 35.75%, or £2,655. Total tax and NI across the company and the person: £18,958, leaving £51,042.

So at £70,000 of profit, fully extracted, the sole trader is about £870 a year better off — before the company has paid a penny of extra accountancy or filing cost. Run the same comparison against the pre-April-2026 dividend rates and the two structures come out level. The tax case for incorporating at this level of profit has genuinely weakened, and anyone quoting you a comparison built on 8.75% dividend rates is working from last year's rules. Our salary vs dividend calculator lets you run your own figures rather than taking ours on trust.

Why the answer flips when you don't need all the money

The example above assumes you take everything out. Change that one assumption and the arithmetic reverses, because the two structures tax retained profit completely differently.

As a sole trader you are taxed on the profit whether or not you touch it. Leave £30,000 in the business bank account to fund stock, a van or a hire, and you have still paid Income Tax and Class 4 NI on it — at a marginal 42% if you are into higher rate, and at an effective 62% on profit between £100,000 and £125,140 where the personal allowance is being clawed back at the same time.

A company only taxes retained profit at Corporation Tax rates: 19% below £50,000 of profit and a marginal 26.5% between £50,000 and £250,000. The second layer of tax only arrives if and when you declare a dividend. On £30,000 of profit you genuinely intend to reinvest, that is roughly £5,700 to £7,950 of tax inside a company against £12,600 as a higher-rate sole trader. That gap, not the extraction comparison, is the real financial argument for incorporating — and it only exists if you are actually reinvesting.

Admin burden, and what it costs

Sole trader status is administratively lighter. You register with HMRC, keep records of income and expenses, and file one Self Assessment tax return a year. A limited company comes with meaningfully more: incorporating and maintaining the company at Companies House, filing a confirmation statement annually, preparing and filing statutory year-end accounts, submitting a Corporation Tax return, running payroll through PAYE if you pay yourself a salary, and keeping proper records of dividends and board decisions.

The direct fees are small — Companies House charges £100 to incorporate online and £50 a year for the confirmation statement. The real cost is the extra professional work: statutory accounts, a CT600, a payroll scheme and dividend paperwork are simply more to prepare than one tax return, and firms price accordingly. When you are weighing the tax difference in the example above, put your own accountant's quote for both structures next to it, because on a £70,000 profit the fee gap can be larger than the tax gap.

When people typically switch

There's no single trigger, but a few patterns come up repeatedly. Owners often consider incorporating once profits reach a level where the tax treatment of a limited company starts to look more efficient than paying Income Tax and National Insurance on everything as a sole trader. Others switch for credibility or perception reasons — some clients, especially larger organisations, prefer to deal with limited companies. Limiting personal risk is another common driver, particularly as a business takes on bigger contracts, more stock, more staff or more liability exposure. And some switch when they're looking to raise external investment or bring in other shareholders, which is far more naturally structured through a limited company than as a sole trader.

What stays the same either way

A few things don't change with your structure. VAT registration is triggered by taxable turnover crossing £90,000 in any rolling 12 months, and it applies identically to a sole trader and a company — our guide on when you need to register for VAT covers the mechanics. Whichever structure you choose you still need proper bookkeeping, still need to hit the same deadlines, and still benefit from software that keeps records current rather than reconstructed after the fact.

One thing does differ, and it currently favours the company. Making Tax Digital for Income Tax applies to sole traders and landlords, not to limited companies. It started on 6 April 2026 for anyone with qualifying income over £50,000, extends to over £30,000 from 6 April 2027 and to over £20,000 from 6 April 2028. If you are caught, it means quarterly digital updates to HMRC using compatible software rather than one annual return — a real change in working habit, set out on our Making Tax Digital page. It is not on its own a reason to incorporate, but it belongs in the comparison.

A decision rule you can apply this week

You can settle most of this in half an hour with your last set of accounts in front of you. Work through it in order and stop at the first clear answer:

Do you carry real liability risk? Physical work on other people's property, products that could injure someone, contracts with meaningful damages clauses, employees. If yes, limited liability is the argument on its own and the tax comparison is secondary.
Do your customers require it? Some larger organisations and public bodies will not contract with an unincorporated supplier. This is a factual question you can ask them, not a judgement call.
How much profit will you leave in the business over the next 12 months? Write the number down. If it is above roughly £15,000-£20,000 and you are a higher rate taxpayer, the 26.5% versus 42% gap starts to outweigh the extra running cost quickly.
If the answer to (3) is "none, I need it all to live on", the worked example above applies to you, and at £70,000 of profit incorporating costs you money in 2026/27.
Are you raising investment or bringing in a co-owner in the next two years? If so, incorporate now rather than mid-negotiation.

If you get to the end without a clear yes, staying a sole trader for another year is a perfectly respectable answer — and a cheaper one than incorporating and unwinding it. If you are already a director, our limited company directors' guide covers what the role actually obliges you to do.

Can you switch later?

Yes — and in practice, plenty of people do. It's common to start as a sole trader while testing an idea, when the lighter admin and lower cost of getting going outweigh the benefits of incorporating, and then move to a limited company once the business is established and profits justify the extra complexity. Moving from sole trader to limited company is a well-trodden path with established processes; moving the other way is far less common but not impossible. Either way, it's a decision worth making deliberately rather than defaulting into, since unwinding the wrong structure later can cost more time and money than getting it right from the start.

This isn't personalised advice

Everything above is general, high-level information to help you understand the shape of the decision — it isn't personalised tax or legal advice, and the right structure for you depends on your specific profits, plans, risk exposure and circumstances, which will always be more nuanced than a general guide can cover. If you're weighing this up for your own business, it's worth speaking to Buzz for advice specific to your situation before you decide.

If you'd like to see how Buzz supports each structure day to day, have a look at our pages for sole trader accountants and limited company accountants, or book a discovery call and we'll talk through what makes sense for you.