Sole trader vs limited company: which actually puts more money in your pocket? (2026/27)

Here's a question worth asking yourself: if someone told you there was a legal way to keep an extra £2,000–£5,000 of your income each year, would you look into it?

For a lot of freelancers, switching from sole trader to limited company is exactly that. Not a loophole, not anything complicated — just using the tax rules the way they were designed to be used. Run your own numbers through our interactive freelance calculator to see what the difference looks like for you. The problem is that most people never look into it because the words "limited company" sound more serious than they need to.

So let's actually run the numbers.

The two structures, in plain English

As a sole trader, you and your business are the same legal entity. You pay income tax and National Insurance on your profits. It's simple to set up and simple to run, but HMRC takes its cut before you get anywhere near your money.

As a limited company director, your business is a separate legal entity. You pay yourself a small salary (usually around the personal allowance or NI threshold) and take the rest as dividends. Dividends are taxed at a lower rate than income. Your company also pays Corporation Tax on its profits — but that rate is lower than income tax too.

The result? More of what you earn ends up in your bank account.

What the numbers actually look like

Let's take a realistic example: a freelancer earning £74,000 gross revenue in 2026/27, with £1,500 in business expenses and no pension contributions yet.

Item	Sole Trader	Limited Co.
Gross revenue	£74,000	£74,000
Business expenses	−£1,500	−£1,500
Director's salary	—	−£12,570
Corporation Tax (19%)	—	−£11,395
Available as dividends	—	£48,535
Income Tax + NI	−£20,407	−£8,919
Take-home pay	£52,093	£54,651

And that's before the pension advantage, which is where it gets even more interesting.

The pension angle (this is the bit most people miss)

A limited company can make employer pension contributions directly from company profits. These contributions reduce your taxable profit before Corporation Tax is calculated, which means the government is effectively subsidising your pension at the Corporation Tax rate.

Put in £5,000 as a company pension contribution and you save around £950 in Corporation Tax. That's money that would have gone to HMRC sitting in your pension instead, growing tax-free.

Sole traders can contribute to a pension too, but they don't get the employer contribution route — their pension contributions come from post-tax income (with personal tax relief added back). It's less efficient.

So why doesn't everyone just go limited?

Fair question. The honest answer is: it does come with more admin. You'll need to:

• File annual accounts at Companies House
• Submit a Corporation Tax return each year
• Run a payroll (even a minimal one)
• Keep your business and personal finances properly separate

Most freelancers find a good accountant handles all of this for £800–£1,500 a year. When you're saving £2,000–£5,000+ in tax, that's still a significant net gain.

There's also a threshold to consider. Below around £30,000–£35,000 in profit, the tax savings don't outweigh the accountancy costs and admin. The sweet spot for going limited is typically somewhere around £35,000+ in annual profit.

What about IR35?

If you work through a limited company, IR35 is worth understanding. It's a set of rules designed to catch people who are effectively employees but billing through a company to reduce tax. If HMRC decides your working arrangement looks like employment, they can apply income tax and NI to your income as if you were employed — wiping out most of the advantage.

In practice, IR35 mainly affects contractors working for medium and large organisations who have made an IR35 determination on your role. If you work across multiple clients, take genuine business risk, and control how and when you work, you're likely to be outside IR35. But it's worth checking — especially before taking on a long-term engagement with one client.

The honest summary

Sole trader is simpler. Limited company keeps more of your money. That's genuinely it.

If you're earning under about £35,000 in profit: stay sole trader, keep it simple, revisit when your income grows.

If you're earning above that: run the numbers properly for your situation. For most people at £40,000+ in profit, the limited company advantage is real, meaningful, and compounds every year you delay making the switch.

The best place to start is knowing exactly where you stand. What's your current day rate? What does your take-home actually look like under each structure? That's what the calculator below is for.