As a business accountant working with clients across the UK, one of the most common questions we hear is:
“Should I register as a limited company or stay as a sole trader?”
The answer has become more complex in recent years due to constant UK tax changes, shifts in corporation tax rates, and the upcoming Making Tax Digital (MTD) rollout.
Below, we have done some tax analysis, which provides the break down the financial and practical implications of each option — so you can make an informed choice for your business.
The Changing UK Tax Year: What’s New for 2025–26
The UK tax landscape continues to evolve. Following Rishi Sunak’s reduction in the National Insurance (NI) rate to 8%, the difference between taking a salary and dividends has narrowed. For small businesses, that 1% difference could soon influence how company directors pay themselves.
Tax Comparison: Sole Trader vs Limited Company
At AJ Financial, we advise clients not to base their decision solely on tax. Switching between a sole trader and a limited company (or vice versa) is a significant event for your business, and there are other critically important considerations that you should discuss with your accountant before reaching a decision.
That said, let’s look at how take-home pay compares under current corporation tax and income tax rates for the 2025–26 UK tax year:
| Profit (£) | Take-Home – Ltd Company (£) | Take-Home – Sole Trader (£) | Sole Trader Advantage / (Disadvantage) |
|---|---|---|---|
| 20,000 | 17,266 | 18,068 | +802 |
| 40,000 | 32,049 | 32,868 | +820 |
| 60,000 | 46,831 | 46,111 | (720) |
| 80,000 | 56,804 | 57,711 | +907 |
| 100,000 | 66,543 | 69,311 | +2,768 |
👉 For most small business owners earning under £50k, remaining a sole trader may currently be more tax-efficient — depending on income level and expenses.
Partnerships and Two-Director Companies
If you’re in a partnership or a two-director limited company, the difference shifts again:
| Profit per Partner (£) | Take-Home per Director (Ltd) | Take-Home per Partner | Advantage / (Disadvantage) |
|---|---|---|---|
| 20,000 | £18,105 | £18,068 | (37) |
| 40,000 | £32,722 | £32,868 | +147 |
| 60,000 | £46,135 | £46,111 | (24) |
| 80,000 | £56,115 | £57,711 | +1,596 |
| 100,000 | £65,854 | £69,311 | +3,458 |
* Assuming the Employer’s Allowance is already used and the director’s salary is £12,570.
The key reason for this difference is the increase in corporation tax rates from April 2023 for companies with profits above £50,000. This means many small limited companies are now paying more tax than before, especially those with consistent growth or multiple shareholders.
How Making Tax Digital Affects You
MTD for Sole Traders: From April 2026, self-employed individuals will need to file quarterly digital returns — an extra layer of admin for those who manage their own accounts.
MTD for Companies: There are no plans to apply this to limited companies, giving incorporated businesses more flexibility.
It’s also worth noting that HMRC has not yet confirmed when MTD rules will apply to partnerships, offering an extended grace period.
For many clients, AJ Financial handles the full MTD transition — from software setup to VAT registration and quarterly submissions — keeping the process straightforward and compliant.
Limited Companies: Optimising Director Salaries and Payroll
It’s still early enough in the UK tax year to adjust your payroll — and our business accountants can calculate your best setup before 5 April 2026.
Professional Advice from Chartered Management Accountants
At AJ Financial, our mission is to help clients make confident financial decisions. Whether you need guidance on:
Corporation tax planning
Self assessment tax returns
VAT registration or compliance
Payroll and director salary optimisation
Or simply finding the right business accountant near you
…our team provides strategic, personalised support tailored to your business goals.
Get a Salary Optimisation Review – and a 25% Discount
If you’d like a professional opinion on your tax-optimised income, salary, or business structure, get in touch with our team.
📧 Email: info@aj-financial.co.uk
📞 Phone: 01823 746382
💬 Our Tax-Optimised Salary Review is normally £300+VAT but contact us and Quote “MTD Blog” for a 25% discount until 18th November. If you are an existing client, this is already done, is FREE, and all part of the service.
We’ll ask for a few financial details so our accounting experts can calculate your tax return, corporation tax exposure, and take-home pay precisely — because as every good business accountant knows, the numbers matter.
