For years, the answer to "should I incorporate?" was almost reflexive: above roughly £30,000 of profit, a limited company beat self-employment on tax. In 2026 that rule of thumb no longer holds. Corporation Tax now sits at 25% for profits over £250,000 with marginal relief between £50,000 and £250,000, the dividend allowance has collapsed to £500, and personal allowances remain frozen until 2028. The maths has moved.
The headline numbers for 2025/26
To compare like with like, model a director-shareholder taking a salary up to the secondary NIC threshold and the rest as dividends, against a sole trader paying Income Tax and Class 4 NICs on the same profit:
- £30,000 profit: sole trader and Ltd are now within a few hundred pounds of each other after running costs.
- £60,000 profit: Ltd typically retains a £1,500–£2,500 advantage, but only after factoring in accountancy fees, Companies House filings and the new identity verification regime.
- £100,000+ profit: Ltd pulls ahead more clearly, especially where profits can be retained, reinvested, or split with a spouse who is a genuine shareholder.
Tax is only one input
Tax efficiency rarely tips the decision on its own. The bigger drivers we see in practice are:
- Liability protection. If you sign contracts, hold client money or carry product risk, a limited company is a defensive structure, not a tax tool.
- Credibility. Larger customers, lenders and procurement portals increasingly insist on a registered company number before opening an account.
- Investment readiness. EIS, SEIS, EMI options and outside equity all require a company. A sole trader cannot issue shares.
- Profit retention. Sole traders are taxed on profit whether they draw it or not. Companies tax retained profit at 19–25% and defer the personal layer.
The new costs of being a company
The Economic Crime and Corporate Transparency Act has added friction. Every director and Person with Significant Control must now complete identity verification, either directly or through an Authorised Corporate Service Provider. Companies House fees have risen, registered office rules are stricter, and confirmation statements carry meaningful penalties when missed. None of this kills the case for incorporation, but it does mean a "shell" company sitting dormant just for tax planning is no longer free.
When sole trader still wins
We routinely advise clients not to incorporate where any of the following apply: profits under £30,000 with no growth trajectory; consulting income that is genuinely personal and unlikely to scale; lifestyle businesses where the owner draws everything each year; or trades carrying losses that are more usefully relieved against other personal income.
The 2026 decision framework
Rather than a single profit threshold, we use a four-question test:
- Do you need limited liability for the activity?
- Will profits exceed £50,000 within the next 12 months?
- Do you intend to retain or reinvest profit rather than draw it all?
- Are you raising investment, issuing options, or planning a sale within five years?
Two or more "yes" answers and incorporation is almost always the right move. Zero or one, and staying self-employed is usually cheaper and simpler.
How we help
Our UK company formations team runs a structured incorporation review for every prospective client, including a tax projection across both routes and a Companies House readiness check. Where incorporation is the right call, we handle the formation, share structure, identity verification and first-year compliance in one engagement. Where it is not, we say so. Book a 30-minute consultation and we will model your specific numbers before you commit.
For an ongoing view of the tax picture, our tax planning service revisits the sole-trader-versus-company question annually as your profit and life circumstances change.