Many successful freelancers and side-hustlers face the question: should I incorporate? The answer is almost always about tax efficiency — and it depends heavily on how much profit you make and how much you need to take home. This guide compares both structures at different income levels.
How sole traders are taxed
As a sole trader, your business profit is treated as personal income. You pay:
- Income tax at your marginal rate (20%/40%/45%)
- Class 2 NI: £3.45/week (flat rate, if profits exceed £6,725)
- Class 4 NI: 6% on profits between £12,570 and £50,270, 2% above
The advantage: simplicity. No company accounts, no Corporation Tax return, no Companies House filings. Minimal bookkeeping.
How limited company directors are taxed
A limited company pays Corporation Tax (25%) on profits. You then extract money through a combination of salary and dividends:
- Small salary (£12,576) — no NI, deductible for CT
- Dividends taxed at 8.75% / 33.75% / 39.35% (no NI)
The advantage: lower overall tax rate on profits up to ~£100K. The disadvantage: administrative burden, filing requirements, IR35 considerations, and accounting fees (typically £1,000–£2,500/year).
Comparison at different profit levels
| Annual profit | Sole trader total tax | Ltd company total tax | Annual saving (Ltd) |
|---|---|---|---|
| £30,000 | ~£5,400 | ~£5,100 | ~£300 |
| £50,000 | ~£12,200 | ~£10,100 | ~£2,100 |
| £80,000 | ~£23,400 | ~£18,800 | ~£4,600 |
| £100,000 | ~£32,800 | ~£25,200 | ~£7,600 |
Approximate figures assuming optimal salary/dividend split for Ltd. Does not include accounting fees.
When to incorporate
The general tipping point is around £40,000–£50,000 of annual profit. Below this, the tax saving is marginal and may be offset by accounting fees. Above this, the savings become significant.
Other reasons to incorporate: limited liability, credibility with larger clients, access to tax-free employer pension contributions.
When to stay sole trader
- Profits under £40,000
- You value simplicity over tax savings
- You want to use losses against other income flexibly
- You plan to wind down the business soon
Calculate your position
Use the income tax calculator to see what you would pay as a sole trader (enter your profit as salary). Then use the dividend tax calculator to model the limited company route with the optimal salary/dividend split.