Last updated: 14 October 2026
Should you incorporate your business now it’s making a profit?
It’s worth considering once your profits are consistently higher than you need to live on, so you can leave some in the business. A limited company pays corporation tax at 19% on profits up to £50,000, rising to 25% above £250,000, and you can take a small salary plus dividends. But dividend tax rose by 2 percentage points from April 2026, employer NIC is 15%, and companies have more admin and costs. For many sole traders, the saving is now smaller than it used to be.
Sole trader versus company for 2026/27 profits of £60,000
| Item | Sole trader | Limited company (salary £12,570, rest as dividends) |
| Income tax on salary or profit | £11,432 | £0 (salary covered by Personal Allowance) |
| Class 4 NIC or employer NIC | £2,457 (Class 4) | £1,136 (employer NIC on salary above £5,000) |
| Corporation tax | n/a | £8,796 (19% on £46,294) |
| Dividend tax | n/a | £3,977 (10.75% on £36,998 after the £500 allowance) |
| Total tax | about £13,889 | about £13,909 |
| Accountancy and admin | Lower | Higher |
If all the profit is drawn out, the totals are almost identical at this level, and the company’s extra costs make it more expensive overall. For a one-director company without staff, the Employment Allowance isn’t available, which reduces the advantage. Results vary with profit level and how much you take out.
When a company makes more sense
- You’ll leave profits in the company to reinvest
- You want limited liability for business debts
- You want to bring in investors or share ownership
- You can split shareholding with a spouse
- Pension contributions from the company reduce corporation tax
When it may not
- You need all the profits to live on
- Profits are modest, as the fixed costs of running a company outweigh any saving
- You’re inside IR35
- You want to keep admin simple
Example
Tom, a sole trader web developer, makes £90,000 profit but only needs £45,000 to live on. As a company, he takes a £12,570 salary and £32,000 dividends, leaving the rest in the company to grow. His personal tax is far lower because the retained profit is only taxed at corporation tax rates for now. He can pay employer pension contributions too.
How to incorporate
- Form the company with Companies House
- Transfer the trade and assets, perhaps with incorporation relief for CGT
- Register for corporation tax and PAYE
- Close the sole trade for Self Assessment
- Open a business bank account
Common mistakes
- Incorporating for small profits
- Drawing money without declaring dividends
- Forgetting cessation rules for the sole trade
- Overlooking the cost of goodwill transfers
Retained profits change the picture
The saving comes mainly from leaving money in the company. Profits kept in the company are taxed only at 19% to 25% until you draw them, compared with up to 47% for a higher rate sole trader including NIC. If you later extract them when your income is lower, such as in retirement, the overall tax can be much lower.
Frequently asked questions
Do I need an accountant?
It’s strongly recommended.
Can I go back to being a sole trader?
Yes, but disincorporation can trigger tax.
Do I lose my old tax losses?
Unused trading losses can be set against income from the company in some cases.
Is VAT affected?
The company may need to register or transfer the VAT number.
Related: the best business structure, giving shares to your wife and buy property personally or through a company.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with incorporation advice. See our limited company accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
