Why it matters
Setting up as a sole trader or limited company director isn’t just a bureaucratic choice—it’s a strategic decision that affects your taxes, your rights, and your long‑term goals. Whether you’re nearing £50K income and facing MTD ITSA, or edging over £100K and losing your personal allowance, this clear breakdown will help you understand the impact on your take‑home pay and future planning.
Detailed comparison of some common areas
Here’s a side‑by‑side snapshot:
| Feature | Sole Trader | Limited Company Director |
| Ownership of funds | 100% completely yours | Owned by the company – you receive funds via salary and/or dividends |
| Liability | Unlimited liability – you are personally responsible for all business debts | Limited liability – see the planning for the future section below to find out more |
| Expenses | Wholly and exclusively business (can apportion mixed-use) | Business only; mixed-use may be a benefit in kind* (*extra tax & reporting charge) |
| Tax structure | Income tax + Class 2 & 4 NICs | Corporation tax + salary/dividend tax |
| Personal allowance | Applies until income exceeds £100K | Same taper applies via your salary + dividends |
| Admin | Minimal paperwork – annual Self Assessment only (plus MTD ITSA when applicable) | Higher admin load – maintain statutory records, prepare formal accounts, file corporation tax returns, and submit a confirmation statement annually |
| Reporting obligations | Submit annual Self Assessment to HMRC; under MTD ITSA, send quarterly updates and an end-of-year statement | File annual accounts and a corporation tax return with HMRC, submit a confirmation statement to Companies House, and complete a personal Self Assessment for salary/dividend income |
Expenses rules
Sole Trader
You’re allowed to claim wholly and exclusively business expenses—and if something like your phone has mixed personal use, you can proportion the claim (e.g., 60 % business usage). This applies to home office, utilities, vehicles, and more.
Think you’re claiming all your business expenses? Think again—discover the expenses sole traders often miss in our blog “Tax-saving tips for sole traders: expenses you might be missing”.
LTD company director
The company can only cover business-only costs. Anything with personal use is not claimable and can trigger a taxable benefit in kind. There’s zero leeway for apportioning such mixed-use costs in the company accounts.
Reporting and MTD ITSA
Sole Trader
- Current: Submit a Self Assessment annually.
- From 6 April 2026, if gross self‑employment or property income exceeds £50,000, you must use MTD for ITSA. This means quarterly digital updates, an end-of-period statement, and a final declaration via HMRC‑approved software.
Future thresholds:
- From April 2027: threshold reduces to £30,000
- From April 2028: further reduced to £20,000
LTD company director
Must file:
- Company accounts and CT600 (corporation tax return).
- Confirmation statement to Companies House.
- Personal Self Assessment if receiving salary/dividends, including extra 2025/26 details (company name, registration number, dividend amounts, shareholding).
Many directors assume MTD ITSA won’t affect them because they’re not “self-employed”, but it will if they have property income or sole trader side income above the thresholds.
Want to know exactly what MTD ITSA means for you and how to prepare? Read our guide MTD ITSA – getting ready now for a simple step-by-step plan.
Personal allowance cliff at £100K
Once your adjusted net income exceeds £100,000, you lose £1 of personal allowance for every £2 above. By £125,140, your allowance is zero—this creates an effective 60 % marginal tax rate* in that band. This applies whether you’re a sole trader or director (based on your total income).
*This happens because you’re paying 40% income tax on extra earnings and also losing £1 of your personal allowance for every £2 earned over £100K, which is then taxed again at 40%.
Corporation tax & marginal relief explained
- Small profits rate: 19% for profits up to £50,000
- Main rate: 25% for profits over £250,000
- Marginal relief: Applies to profits between £50K–£250K, smoothly scaling the tax rate between 19% and 25 %, avoiding a sudden jump
What does this look like in real numbers?
Assumptions:
- Director’s salary is £12,570 (equal to personal allowance)
- Rest taken as dividends, taxed at relevant rates (approx. 8.75% basic, 33.75% higher). Noting there is a £500 tax-free dividend allowance for 2025/26.
- Corporation tax rates/marginal relief as above
| £50,000 | Sole Trader | Limited Company & Director |
| Profit | £50,000 | £50,000 less director’s salary of £12,570 & employers NI £479 = £36,951 post salary profits |
| Income Tax | £7,486 x 20% | – |
| Class 2 NIC | £179 | – |
| Class 4 NIC | £2,246 | – |
| Corporation Tax | – | £7,021 x 19% |
| Profits figure left to take dividends from | £29,930 | |
| Dividend Tax | – | £2,575 |
| Total Tax/ NIC | £9,911 | £10,075 |
| Take-home figure | £40,089 | £39,925 |
| Notes | Profits can be drawn at any time | Company funds—withdrawals only via salary/dividends |
| £100,000 | Sole Trader | Limited Company & Director |
| Profit | £100,000 | £100,000 less director’s salary of £12,570 & employers NI £479 = £86,951 post salary profits |
| Income Tax | £7,540 x 20%, plus £19,892 x 40% = £27,432 | – |
| Class 2 NIC | £179 | – |
| Class 4 NIC | £2,258 x 6%, plus £999 x 2% = £3,256 | – |
| Corporation Tax | – | £11,955 x 13.75% (marginal relief rate) |
| Profits figure left to take dividends from | £74,996 | |
| Dividend Tax | – | £3,299 x 8.75%, plus £12,419 x 33.75% = £15,718 |
| Total Tax/ NIC | £30,868 | £28,151 |
| Take-home figure | £69,132 | £71,849 |
| Notes | Profits can be drawn at any time | Company funds—withdrawals only via salary/dividends |
| £250,000 | Sole Trader | Limited Company & Director |
| Profit | £250,000 | £250,000 less director’s salary of £12,570 & employers NI £479 = £236,951 post salary profits |
| Income Tax | £7,540 x 20%, plus £29,948 x 40%, plus £25,570.35 x 45% = £96,189 | – |
| Class 2 NIC | £179 | – |
| Class 4 NIC | £2,258 x 6%, plus £3,999 x 2% = £6,256 | – |
| Corporation Tax | – | £58,455 x 25% |
| Profits figure left to take dividends from | £178,496 | |
| Dividend Tax | – | £3,299 x 8.75%, plus £29,493 x 33.75%, plus £20,520 x 39.35% = £54,312 |
| Total Tax/ NIC | £102,625 | £113,245 |
| Take-home figure | £147,375 | £136,755 |
| Notes | Profits can be drawn at any time | Company funds—withdrawals only via salary/dividends |
With a limited company, you don’t have to take all profits out in the same tax year. You can leave money in the company for future investment, to smooth income over multiple years, or to avoid crossing into higher/additional rate tax bands. A sole trader doesn’t have this flexibility—profits are taxed in the year they’re earned, whether or not you withdraw them.
These figures are illustrative—exact amounts depend on circumstances. Accuracy gets stronger with precise tax banding, NICs, and expenses.
Dividends can be a tax-efficient way to pay yourself—but only if you know the rules. Check out Understanding dividend tax for directors to see how it works in practice. Alongside our Salary, dividends or both? blog for help deciding the best mix for your situation.
Pensions and how they change the picture
Pension contributions can be a powerful way to reduce your tax bill and boost your retirement savings—but the rules (and benefits) differ for sole traders and limited company directors.
Sole Trader
- Pension contributions are made personally from your after-tax profits.
- You receive income tax relief at your highest marginal rate—so if you’re a higher-rate taxpayer, a £10,000 pension contribution could cost you as little as £6,000 after relief.
- However, because contributions are made personally, you still pay Class 2 and Class 4 NIC on those profits before the contribution.
- Pension savings don’t reduce your taxable profits for National Insurance purposes—they only reduce your income tax bill.
Limited company director
- Your company can make employer pension contributions directly to your pension.
- These contributions are treated as a business expense, reducing your company’s taxable profits and, therefore, the corporation tax bill.
- There’s no NIC or dividend tax on employer pension contributions—so they can be more tax-efficient than taking extra salary or dividends.
- The contribution must be “wholly and exclusively” for the purposes of the business, which usually means it should be reasonable given your role and the company’s size/profits.
- Employer contributions count toward your annual allowance (£60,000 for 2025/26, plus any unused allowance from the previous three tax years).
Why this matters for the figures above
- For sole traders, a £10,000 pension contribution might save £4,000 in income tax at the higher rate, but won’t save any NIC.
- For directors, the same £10,000 made as an employer contribution could save £1,900 in corporation tax (at 19%) or £2,500 (at 25%), and avoid NIC and dividend tax entirely—meaning more of your business’s money ends up in your pension instead of HMRC’s coffers.
TIP: Large pension contributions can be particularly effective for directors with profits pushing them into higher or additional rate tax bands, or where personal allowance tapering is in play. They can also help keep taxable income under key thresholds (like £100K) to retain allowances.
Partners, children & basic allowances
- Marriage Allowance: You can transfer £1,260 of your unused personal allowance (if under the threshold) to your partner.
- Child Benefit: Phased out if you or your partner earns over £60K (via the High Income Child Benefit Charge).
- Note on advanced planning: Dividend splitting with spouse or children can help reduce tax burden—but rules are complex. Contact DNA to discuss tailored, compliant strategies.
Planning for the future & legal considerations
Limited liability – protecting your personal assets
One of the biggest advantages of running a limited company is limited liability. In most cases, the company is treated as a separate legal entity from you. If the business runs into financial trouble, your personal assets—such as your home, car, or savings—are generally protected. You’re only responsible for the company’s debts up to the value of any unpaid shares you hold. This protection can give you greater peace of mind when taking on contracts or making investments, as the financial risk to you personally is much lower compared to operating as a sole trader.
Sole Trader
- Pros: Simpler setup, flexibility, full control of cash flow
- Cons: Personal liability, no separate legal entity, higher NICs and fewer tax planning tools
LTD company/director
- Pros: Limited liability, tax planning opportunities (dividends, pension), structured separation of personal/business funds
- Cons: More admin, careful around extracting funds—you’re an employee/shareholder, not the owner of company funds
Conclusion: what to consider
Choosing between being a sole trader or a limited company director goes beyond tax—it’s about how you run your business, manage risk, and plan growth. Watch key thresholds like £50K (MTD ITSA) and £100K (personal allowance) as they can significantly affect take-home pay.
Need help figuring out what suits your situation best? For personalised comparisons or family tax planning (e.g. for income splitting), DNA is ready to help.