Quick Summary
- Sole traders pay income tax and Class 4 National Insurance on all profits; admin is simple.
- Limited companies pay Corporation Tax at 19%–25%, and directors usually take a small salary plus dividends.
- Dividend tax rates rose from April 2026, which narrows the tax saving from incorporating.
- A company gives limited liability but brings accounts, filings and public records.
- Incorporating is usually worth reviewing once profits are regularly above £40,000–£50,000.
"Should I go limited?" is one of the questions we're asked most by growing sole traders in Glasgow. There's no single right answer — it depends on your profits, how much you take out, your plans and how much admin you're happy with. Here's how the two compare in 2026/27.
How each is taxed
| Sole trader | Limited company | |
|---|---|---|
| Tax on profits | Income tax on all profits (Scottish rates 19%–48%) | Corporation Tax: 19% up to £50,000, 25% over £250,000, marginal relief between |
| National Insurance | Class 4: 6% then 2% | On salary only; none on dividends |
| Taking money out | All profit is yours, taxed whether you withdraw it or not | Salary and dividends; profits left in the company aren't taxed on you personally |
| Dividend tax (2026/27) | — | £500 allowance, then 10.75% basic rate, 35.75% higher rate, 39.35% additional rate |
Note that dividends are taxed at UK rates, not Scottish income tax rates. For Scottish higher earners in particular, a mix of salary and dividends can still work out cheaper than self-employed income.
The admin difference
Sole trader: register with HMRC, keep records, file one Self-Assessment return a year (plus quarterly updates under Making Tax Digital once turnover is over £50,000).
Limited company:
- Annual statutory accounts filed with Companies House
- A Corporation Tax return (CT600) every year
- An annual confirmation statement
- Payroll for directors' salaries
- A personal Self-Assessment return for each director taking dividends
- Identity verification for directors with Companies House
That usually means higher accountancy fees, which need to be weighed against any tax saving.
Liability and privacy
As a sole trader, you're personally responsible for business debts. A limited company is a separate legal entity, so your personal assets are generally protected (though banks often ask directors for personal guarantees). On the other hand, a company's accounts, directors and shareholders appear on the public Companies House register.
When does going limited make sense?
Signs it may be worth it:
- Profits are regularly above about £40,000–£50,000
- You don't need to take all the profit out each year
- You want to bring in shareholders or pay family members who work in the business
- Clients prefer, or insist on, working with limited companies
- You want to limit personal liability
It's less likely to help if your profits are modest, you need every pound to live on, or you're a contractor whose work falls inside IR35.
How to switch from sole trader to limited company
- Form the company at Companies House (we can do this for you — see company formation).
- Open a business bank account in the company's name.
- Transfer the business, contracts and assets, and tell customers and suppliers.
- Set up payroll and register the company for Corporation Tax (and VAT if needed).
- Tell HMRC you've stopped being self-employed and file a final sole trader return.
We'll model your figures both ways before you decide — see our guide to director salary vs dividends.
Frequently Asked Questions
At what profit should I become a limited company?
There's no fixed figure, but it's usually worth reviewing once profits are regularly above about £40,000–£50,000 and you don't need to draw all of them each year.
Is a limited company more tax efficient than a sole trader?
Often at higher profits, because Corporation Tax and dividend tax can total less than income tax and National Insurance. The saving narrowed when dividend tax rates rose in April 2026, and extra admin costs must be weighed up.
What are the dividend tax rates for 2026/27?
After the £500 dividend allowance, dividends are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band. These are UK rates and apply to Scottish taxpayers too.
Can I switch from sole trader to limited company mid-year?
Yes. You can incorporate at any time. You'll file a final Self-Assessment for the sole trader business and the company starts its own accounting period.
Do limited companies pay more accountancy fees?
Usually yes, because a company needs annual accounts, a Corporation Tax return, a confirmation statement, payroll and directors' tax returns.
Thinking of Going Limited?
We'll compare sole trader and limited company figures for your business and handle the switch if it makes sense.
Sardar Muhammad, AAT
Sardar is the founder of LimeTree Accounting Solutions, an AAT-accredited practice in Govanhill, Glasgow. He works with sole traders, tradespeople, landlords and small limited companies across Glasgow and Clydebank.
This guide is general information based on UK and Scottish tax rules as at 13 October 2026. It is not personal advice. Rates and thresholds change, so speak to us about your own situation.