If you’ve been Googling “self employed vs limited company”, you’ve probably already read articles telling you that a limited company saves you a fortune in tax. Some of them even include worked examples showing you keeping thousands more each year. It sounds compelling — and it can be true. But the picture in 2026 is more nuanced than it was five years ago, and a lot of those examples haven’t caught up.

We work with owner-managed businesses across Greater Manchester and the UK, and this question comes up constantly — from tradespeople thinking about incorporating, to IT contractors uncertain about IR35, to freelancers who’ve just had a good year. Our take is that the right structure depends on a handful of factors that most general advice glosses over. In this post, we’ll walk through those factors honestly.

As a self-employed sole trader, your business and you are legally the same entity. You register with HMRC, file a Self Assessment tax return each year, and pay Income Tax and National Insurance on your profits. The admin is relatively light, and you don’t need a separate business bank account (though you should have one). There are no Companies House filings, no annual accounts in the formal sense, and no corporation tax returns.

A limited company is a separate legal entity. You are a director and, in most cases, a shareholder. The company pays corporation tax on its profits, and you extract money from it — typically a combination of a modest salary and dividends. This is the structure most people have in mind when they talk about the tax benefits of incorporating.

The practical differences go beyond tax. Running a limited company means more filing obligations: annual accounts with Companies House, a confirmation statement, a corporation tax return (CT600), and if you run payroll, monthly PAYE submissions. You will almost certainly need an accountant, whereas many sole traders manage their Self Assessment themselves — at least in the early years.

Neither structure is inherently better. The question is which one fits your income level, working arrangements, and tolerance for admin right now.

The tax argument for a limited company rests on combining a low salary (typically around the Secondary Threshold, currently £5,000 per year) with dividends. Dividends are taxed at lower rates than income — 8.75% in the basic rate band and 33.75% in the higher rate band — and are not subject to National Insurance. Corporation tax is charged at 19% on profits up to £50,000 (the small profits rate), rising to 25% on profits above £250,000, with marginal relief in between.

For a sole trader, profits above the Personal Allowance are subject to Income Tax at 20%, 40%, or 45%, plus Class 4 National Insurance contributions. That combination at higher earnings levels is materially more than the effective rate through a limited company — but how much more depends on what you actually draw out of the company and when.

In our experience, the tax saving becomes meaningful and worth the additional overhead somewhere around £40,000–£50,000 of consistent annual profit. Below that level, the accountancy fees, additional filing costs, and time involved in running a company often erode — or entirely eliminate — the tax advantage.

One thing worth noting: the dividend allowance has been cut significantly in recent years and now sits at just £500. That has narrowed the gap between the two structures, and some of the calculator outputs you’ll find online are still working with older, more generous figures. Always check the date on the source.

The headlines about limited company tax savings rarely mention what it costs to run one properly. Let’s be straight about this.

A reasonable accountancy fee for a one-person limited company — covering year-end accounts, corporation tax return, payroll, and Self Assessment — is likely to start at £1,500–£2,500 per year and can go higher depending on the complexity of the business. As a sole trader with straightforward income, you might pay £300–£600 for your Self Assessment, or file it yourself at no cost.

Then there are the Companies House obligations. The confirmation statement is a small annual cost, but it’s another deadline to track. If you fall behind on your accounts or let your company’s filing slip, Companies House can strike the company off — which creates a serious problem if there’s money inside it.

There’s also the mental overhead. Keeping your personal and company finances completely separate, understanding what you can legitimately claim as a business expense versus what counts as a benefit in kind, and tracking dividends carefully all require more discipline than sole trader bookkeeping. None of this is insurmountable — it’s just real, and it’s rarely mentioned in the “you should incorporate” articles.

Our position: factor in the true cost of running the structure, not just the headline tax rate comparison. The net saving needs to be worth the effort and expense.

If you’re a contractor working through a limited company, IR35 is unavoidable. The off-payroll working rules exist to ensure that workers who would effectively be employees — if the intermediary didn’t exist — pay broadly the same Income Tax and National Insurance as employees. If your engagement is caught by IR35, the tax advantage of your limited company structure largely disappears on that income.

Since 2021, medium and large clients in the private sector have been responsible for determining your employment status. For smaller clients, the responsibility still sits with the worker’s intermediary — but HMRC has the Check Employment Status for Tax (CEST) tool and actively uses it during investigations. If the nature of your work looks like employment — fixed hours, a single client, equipment provided by the client, no real substitution right — your structure may offer less protection than you think.

On the self-employed side, Making Tax Digital for Income Tax is now live. From April 2026, sole traders and landlords with qualifying income above £50,000 are required to keep digital records and submit quarterly summaries to HMRC using MTD-compatible software. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028. This changes the admin calculation for sole traders somewhat — if you’re already using cloud accounting software to comply with MTD, the gap in day-to-day admin between the two structures narrows.

Neither of these is a reason to choose one structure over the other on its own. But they’re context that belongs in any honest comparison.