Sole Trader vs Limited Company: The Real Numbers for Trades

This is the question I get asked more than almost anything else. Should I go limited? Am I paying too much tax as a sole trader? When is the right time to switch?

The honest answer is: it depends. But not in a vague, unhelpful way. It depends on specific numbers, and we are going to work through those numbers right now so you can see exactly where the crossover points are.

I have helped hundreds of plumbing and heating business owners make this decision through Together We Build and Together We Count. Some of them saved thousands by switching. Others saved money by staying as they were. The key is understanding the real numbers, not the myths.

The Basics: What Is the Actual Difference?

Sole Trader

You and your business are the same legal entity. You keep all the profits, and you pay Income Tax and National Insurance on those profits. It is simple to set up, simple to run, and you file one Self Assessment tax return each year.

Limited Company

Your company is a separate legal entity. It pays Corporation Tax on its profits. You then take money out as a combination of salary and dividends, each of which is taxed differently. There is more paperwork, more compliance, and you typically need an accountant.

Let Us Run the Numbers

For these examples, I am using 2025/26 tax rates and assuming you are your only source of income. I am also assuming reasonable business expenses have already been deducted, so these figures represent your taxable profit.

Scenario 1: £40,000 Profit

As a Sole Trader

• Personal Allowance: £12,570 (tax-free)
• Income Tax on £27,430: £5,486 (all at 20% basic rate)
• Class 2 NI: £179 (£3.45/week)
• Class 4 NI: £2,194 (6% on profits between £12,570 and £50,270)
• Total tax bill: roughly £7,859
• Take-home: roughly £32,141

As a Limited Company

Taking a salary of £12,570 and the rest as dividends:

• Corporation Tax on £27,430 profit (after salary): £6,858 (25%)
• Income Tax on salary: £0 (within personal allowance)
• Employer NI on salary: £0 (below threshold)
• Dividends available: £20,572
• Dividend Tax: £0 (within the £1,000 allowance plus basic rate band at 8.75%): roughly £1,713
• Accountancy fees (additional over sole trader): roughly £1,000-£1,500
• Total tax bill: roughly £8,571 plus extra accountancy costs
• Take-home: roughly £30,429 (after extra fees)

Winner at £40k: Sole trader. You are actually slightly better off, and the admin is far simpler. The Corporation Tax rate at 25% has closed the gap significantly compared to a few years ago.

Scenario 2: £60,000 Profit

As a Sole Trader

• Personal Allowance: £12,570
• Income Tax: £5,486 (20% on first £27,430) + £3,892 (40% on next £9,730) = £9,378
• Class 2 NI: £179
• Class 4 NI: £2,262 (6% on £12,570-£50,270) + £194 (2% on £50,270-£60,000) = £2,456
• Total tax bill: roughly £12,013
• Take-home: roughly £47,987

As a Limited Company

Taking a salary of £12,570 and the rest as dividends:

• Corporation Tax on £47,430: £11,858
• Dividends available: £35,572
• Dividend Tax (8.75% on £34,572 after £1,000 allowance): £3,025
• Extra accountancy costs: roughly £1,200
• Total tax bill: roughly £14,883 plus extra fees
• Take-home: roughly £43,917

Wait, that looks worse for the limited company. But here is the thing most people miss.

The limited company advantage at this level is flexibility. You do not have to take all the profit out. If you leave £10,000 in the company for a rainy day or future investment, your dividend tax drops significantly. You can also time when you take dividends across tax years.

If you draw exactly the same amount in both scenarios, the sole trader can still come out ahead at £60k. But if you are strategic about what you leave in the company, the limited company starts to show its value.

Winner at £60k: Depends on your strategy. If you need every penny, sole trader might still be simpler. If you can leave profit in the company, limited starts to make sense.

Scenario 3: £80,000 Profit

As a Sole Trader

• Income Tax: £5,486 + £11,892 (40% on £29,730) = £17,378
• Class 2 NI: £179
• Class 4 NI: £2,262 + £594 (2% on £50,270-£80,000) = £2,856
• Total tax bill: roughly £20,413
• Take-home: roughly £59,587

As a Limited Company

Taking a salary of £12,570 and dividends of £45,000:

• Corporation Tax on £67,430: £16,858
• Dividend Tax on £44,000 (after £1,000 allowance): £3,850 (8.75% within basic rate band) + additional at 33.75% above = roughly £4,894
• Extra accountancy costs: roughly £1,500
• Retained profit in company: roughly £4,078
• Total tax bill: roughly £21,752 plus extra fees (but you still have £4k in the company)
• Cash taken home: roughly £56,076 plus £4,078 sitting in your company

Winner at £80k: Limited company, clearly. Even with extra accountancy costs, the ability to manage how and when you extract profits creates genuine savings. And you have money sitting in the company for investment, equipment purchases, or simply a buffer.

Beyond Tax: What Else Matters?

Limited Liability

As a sole trader, you are personally liable for everything. If your business owes money, creditors can come after your personal assets, including your house.

A limited company creates a legal barrier between you and the business. Your personal assets are generally protected if things go wrong. For a plumbing or heating business where there is always a risk of something going wrong on a job, this matters.

Admin and Costs

A limited company means:

• Annual accounts filed at Companies House
• Corporation Tax return
• Running payroll (even if just for yourself)
• Confirmation statement annually
• Higher accountancy fees (typically £1,000-£2,000 more per year)
• Your personal Self Assessment return as well

As a sole trader, you file one tax return and that is essentially it. The simplicity has real value, especially if you would rather spend your time on the tools than on paperwork.

Perception and Credibility

Some larger contractors and commercial clients prefer to work with limited companies. It can make you look more established. Whether that matters depends on who your customers are. If you are mainly doing domestic work for homeowners, they will not care either way.

Mortgage Applications

This catches people out. Mortgage lenders look at your personal income, not your company’s profits. If you are taking a low salary and modest dividends to save tax, your mortgage affordability might be lower than if you were a sole trader showing higher personal income. Plan ahead if you are thinking of buying a house or remortgaging in the next couple of years.

Common Misconceptions

“Everyone says go limited at the VAT threshold”

The VAT threshold (currently £90,000 turnover) and the decision to go limited are completely separate decisions. You can be a VAT-registered sole trader. You can be a non-VAT-registered limited company. Do not confuse the two.

For more on VAT and which scheme suits your business, we have a separate guide.

“My mate saved loads going limited”

Your mate might have a completely different profit level, expense profile, or personal situation. What works for them might not work for you. Get advice based on your own numbers.

“I will pay less tax on everything”

Not necessarily. At the 25% Corporation Tax rate, the gap between sole trader and limited company is narrower than it used to be. At lower profit levels, you can actually pay more in total through a limited company once you factor in extra accountancy costs.

When Should You Actually Switch?

Based on what I see working with trades businesses every day, here are some general guidelines:

• Profits under £30k: Almost always better off as a sole trader
• Profits £30k-£50k: Worth running the numbers with an accountant, but sole trader is often still fine
• Profits over £50k consistently: Seriously consider going limited
• Growing and taking on staff: Limited company gives you more structure and flexibility
• Concerned about liability: Limited company provides protection

The key word is “consistently.” Do not switch based on one good year. Make sure your profit level is sustainable before making the change, because going back from limited to sole trader is messy and can trigger tax charges.

What to Do Next

If you are thinking about making the switch, or you just want to check whether your current structure is right, here is what I would do:

1. Know your actual profit. Not your turnover. Your profit after all genuine business expenses. If you are not sure, your management accounts will tell you.
2. Think about the next 2-3 years. Where is your business heading? Are profits growing?
3. Factor in everything. Tax is important, but so are admin costs, liability, mortgage plans, and your sanity.
4. Get proper advice. This is not a decision to make based on a blog post or what your mate down the pub says. Get an accountant who understands trades businesses to run the numbers for your specific situation.

If you want help working this out, our team at Together We Count does this every week. We can run the numbers for your exact situation and give you a clear recommendation. Visit our company formations page to get started, or just get in touch for a chat.

And if you want to make sure your business is set up to actually generate the profits worth protecting, Business in a Box gives you the pricing, systems, and financial frameworks to build a trades business that works properly.