Sole Trader vs Limited Company: UK Tax and Invoices 2026/27

Choosing between sole trader and limited company comes down to three questions: how much risk you carry personally, how much profit you make and whether you need to draw all of it, and how much admin you will put up with. The tax gap between the two has narrowed: employer National Insurance is 15% above £5,000 a year and the basic rate of dividend tax is 10.75% for 2026/27. This guide gives the official rates, runs the numbers for £30,000 and £50,000 of profit, and, because this is an invoicing site, spells out what each structure must put on the invoices it sends. The figures apply to England, Wales and Northern Ireland; Scotland has its own Income Tax bands.

What is the difference between a sole trader and a limited company?

A sole trader is you, trading as yourself. A limited company is a separate legal entity, registered at Companies House, run by one or more directors and owned by shareholders, who can be the same person. GOV.UK's Set up a business guide sets out the core differences.

	Sole trader	Limited company
Legal status	You and the business are the same person	The company is legally separate from its owners
Liability for business debts	Unlimited: you are personally responsible	Owners' liability is limited to their investment
Starting up	Trade straight away; register for Self Assessment if you earn more than £1,000 in a tax year	Register at Companies House before trading: £100 online
Tax on profit	Income Tax (20%, 40%, 45%) and Class 4 National Insurance (6% and 2%)	Corporation Tax: 19% up to £50,000, 25% over £250,000, Marginal Relief between
Taking money out	All post-tax profit is yours	Salary (PAYE) and dividends, under company rules
Annual filing	Self Assessment return	Annual accounts, Company Tax Return, confirmation statement, plus the director's own Self Assessment if needed
Privacy	Nothing on a public register	Company details, accounts and directors on the public register
Name on invoices	Your name and any business name	The company's full registered name

You can move from one structure to the other later, and GOV.UK notes it is usually easier to go from sole trader to limited company than the reverse.

How is a sole trader taxed in 2026/27?

You pay Income Tax and Class 4 National Insurance on your taxable profit (income minus allowable expenses), through a Self Assessment return. For 2026/27 (GOV.UK: Income Tax rates; Self-employed National Insurance rates):

Taxable profit band	Income Tax	Class 4 National Insurance
Up to £12,570 (Personal Allowance)	0%	0%
£12,571 to £50,270	20%	6%
£50,271 to £125,140	40%	2%
Over £125,140	45%	2%

The Personal Allowance shrinks by £1 for every £2 of income over £100,000 and is gone at £125,140. Class 2 National Insurance is no longer charged: if your profits are £7,105 or more, Class 2 is treated as paid to protect your National Insurance record, and below that you can pay voluntarily at £3.65 a week. Your first £1,000 of self-employment income is covered by the trading allowance.

How is a limited company and its director taxed in 2026/27?

The company pays Corporation Tax on its profit after expenses, including the director's salary and the employer's National Insurance on it. Then the director pays personal tax on what they take out. For 2026/27:

Tax	Rate or threshold	Source
Corporation Tax	19% on profits of £50,000 or less; 25% over £250,000; Marginal Relief in between	GOV.UK: Corporation Tax rates
Employer National Insurance	15% on salary above £5,000 a year	Rates and thresholds for employers 2026 to 2027
Employee National Insurance	8% on salary between £12,570 and £50,270, 2% above	Same
Employment Allowance	£10,500, but not if the only person paid is the sole director	GOV.UK: Employment Allowance eligibility
Dividend allowance	£500 a year	GOV.UK: Tax on dividends
Dividend tax	10.75% basic rate, 35.75% higher rate, 39.35% additional rate	Same

Dividends are paid out of profit that has already borne Corporation Tax, and dividend income that falls within your unused Personal Allowance is tax-free. The rule about Employment Allowance matters for one-person companies: if you are the only director and the only employee, the company cannot use it to cancel its employer National Insurance.

Worked example: take-home pay at £30,000 and £50,000 profit

Assumptions, stated so you can check them: profit is the business's taxable profit before paying the owner; the owner lives in England and has no other income, pension contributions or student loan; the company pays the director a salary of £12,570 and pays out everything left after Corporation Tax as a dividend in the same tax year; no Employment Allowance (sole director); no VAT effects; accountancy fees, Companies House fees and payments on account are ignored. Figures are rounded to the penny.

	Sole trader, £30,000	Company, £30,000	Sole trader, £50,000	Company, £50,000
Director salary	n/a	£12,570.00	n/a	£12,570.00
Employer National Insurance (15% of £7,570)	n/a	£1,135.50	n/a	£1,135.50
Company profit after salary and employer NI	n/a	£16,294.50	n/a	£36,294.50
Corporation Tax at 19%	n/a	£3,095.95	n/a	£6,895.95
Dividend paid	n/a	£13,198.55	n/a	£29,398.55
Income Tax	£3,486.00	£0.00 on salary	£7,486.00	£0.00 on salary
Class 4 National Insurance	£1,045.80	n/a	£2,245.80	n/a
Dividend tax (10.75% above the £500 allowance)	n/a	£1,365.09	n/a	£3,106.59
Take-home	£25,468.20	£24,403.46	£40,268.20	£38,861.96
Difference		Sole trader keeps £1,064.74 more		Sole trader keeps £1,406.24 more

How the sole trader figures work at £50,000: £50,000 minus the £12,570 Personal Allowance leaves £37,430, taxed at 20% (£7,486) and 6% Class 4 (£2,245.80). The company figures: the £12,570 salary uses the Personal Allowance and sits at the employee National Insurance threshold, so the director pays nothing on it, but the company pays 15% on the £7,570 above £5,000. Corporation Tax takes 19% of what is left, and the dividend is taxed at 10.75% after the £500 allowance, all within the basic-rate band.

What the table does not show is where a company can come out ahead. If your profit pushes you into the 40% band as a sole trader, a company lets you leave profit in the business, taxed at 19% (or more, with Marginal Relief, above £50,000), and take it out in a later year or at a lower rate. Whether that helps depends on whether you need the cash now, and on costs this example ignores, such as accountancy fees. Run your own figures with an accountant before incorporating for tax reasons.

What are the filing duties for each structure?

Duty	Sole trader	Limited company
Registration	Register for Self Assessment; tell HMRC by 5 October after the tax year you started	Incorporate at Companies House (£100 online) and set up Corporation Tax
Annual return to HMRC	Self Assessment online by 31 January after the tax year (for 2025/26: 31 January 2027)	Company Tax Return within 12 months of the end of the accounting period
Paying the tax	By 31 January (plus payments on account where they apply)	Corporation Tax within 9 months and 1 day of the end of the accounting period
Accounts	Keep records; no public accounts	Annual accounts to Companies House within 9 months of the financial year end (21 months from registration for the first accounts)
Annual company check	None	Confirmation statement at least once a year: £50 online
Payroll	Only if you employ someone	PAYE for the director's salary
Identity checks	None	Directors may need to verify their identity with Companies House (through GOV.UK One Login) before filing
Making Tax Digital for Income Tax	Required from 6 April 2026 if your qualifying income was over £50,000 in 2024/25; over £30,000 (2025/26 income) from April 2027; over £20,000 (2026/27 income) from April 2028	Not applicable to the company; applies to a director only for their own self-employment or property income

Sources: Self Assessment deadlines, Prepare and file annual accounts, Pay Corporation Tax, Companies House fees (updated 25 September 2026), File your confirmation statement, Making Tax Digital for Income Tax (updated 26 March 2026).

What must a sole trader put on an invoice?

GOV.UK's invoice rules apply to every UK business. Each invoice must include a unique identification number, your name, address and contact details, the customer's name and address, a clear description of what you are charging for, the supply date, the invoice date, the amounts charged, VAT if applicable, and the total owed.

As a sole trader you must also show:

Your own name, and any business name you trade under. "Priya Shah trading as Shah Studio" covers both. A sole trader's business name must not include "limited" or "Ltd" (GOV.UK: Choose your business name).
An address where legal documents can be delivered to you, if you use a business name.

There is no registration number to show, because sole traders are not registered at Companies House. If you register for VAT (compulsory once taxable turnover passes £90,000 in a rolling 12 months), your invoices to VAT-registered customers must become VAT invoices, with your VAT number and the VAT breakdown. See tax invoice vs regular invoice for the difference.

What must a limited company put on an invoice?

A limited company's invoices must show the full company name exactly as it appears on the certificate of incorporation, including "Limited" or "Ltd". If you choose to name directors on an invoice, you must name all of them.

Separately, GOV.UK's trading disclosure rules require the company's business letters, order forms and website to show:

the company's registered number
its registered office address
where it is registered (England and Wales, Scotland or Northern Ireland)
the fact that it is a limited company

Strictly, those four items are required on letters, order forms and websites rather than invoices, but many companies add them to the invoice footer so every document they send carries the same details. Put your registered number and office on the invoice and the question never arises. The same VAT rules apply once the company is VAT-registered.

Invoice detail	Sole trader	Limited company
Seller name	Your own name, plus any business name	Full registered company name
Address	Contact address; plus an address for legal documents if you use a business name	Contact address; registered office required on letters, order forms and website
Registration number	None	Company number required on letters, order forms and website; common on invoices
Directors' names	n/a	Optional, but all or none
VAT number	Only if VAT-registered	Only if VAT-registered

How do invoices change when you incorporate?

The company is a new legal person, so from the day it starts trading, invoices should be issued in the company's name and paid into the company's own bank account; GOV.UK says company money must be kept separate from the owners'. Tell clients the new legal name and bank details before the first company invoice, update any supplier set-up or purchase-order records they hold, and close out your sole-trader invoices so each sale belongs clearly to one or the other. If you were VAT-registered as a sole trader, the company needs its own VAT arrangement; ask your accountant which route applies.

If you invoice with InvoiceQuickly, the switch is a settings change:

Name and address. The PDF prints the "From" name and free-text address from your invoice details, so enter "Shah Studio Ltd" and add the registered office, "Registered in England and Wales" and the company number to the address block or the Notes.
Numbering. InvoiceQuickly holds one business per account, and the invoice counter can be raised but not lowered, so change the invoice prefix (for example from INV to SSL) to mark where the company's invoices begin.
Supply date and VAT number. The PDF prints an issue date and a due date but no separate supply date, and it copies the saved business tax ID to new invoice PDFs. Put the supply date in the line description or Notes, and save your VAT number in settings before creating the invoice if you are registered.

InvoiceQuickly's Free plan covers 5 invoices and 5 clients; Pro is $9 a month for unlimited invoices, email sending and recurring invoices. See the invoice software page for what is included. InvoiceQuickly does not keep company accounts or run payroll; if you want one tool for invoices and bookkeeping, our software comparisons set it against accounting packages such as FreshBooks, QuickBooks and Xero.

When is each structure the wrong choice?

A limited company is usually the wrong choice if your profit is modest and you need to draw all of it: on our numbers you pay more tax at £30,000 and £50,000, plus accountancy and filing costs, and your company's details go on a public register. It can also be the wrong tool if you expect it to protect you from everything: directors have legal duties of their own, and limited liability does not replace business insurance.

Staying a sole trader is usually the wrong choice if you carry real liability risk that insurance does not cover, if large clients will only contract with a company, or if your profit is well into the 40% band and you do not need all of it each year. If you work for clients through your company in a way that looks like employment, the off-payroll working rules (IR35) can change the tax picture entirely.

Limitations of this guide

This guide covers UK tax for 2026/27 using the rates for England, Wales and Northern Ireland. It does not cover Scottish Income Tax bands, partnerships or limited liability partnerships, pensions, student loans, the High Income Child Benefit Charge, capital gains on selling a business, IR35 in detail or the mechanics of transferring a business into a company. The worked example uses the assumptions stated above and is an illustration, not a forecast. It is not legal or tax advice: check the GOV.UK pages linked above or speak to an accountant before you choose. Last reviewed 27 October 2026.

Frequently asked questions

How much tax will I pay as a sole trader?

For 2026/27, nothing on the first £12,570 of profit, then 20% Income Tax plus 6% Class 4 National Insurance up to £50,270, and 40% plus 2% above that. On £30,000 of profit that is £3,486 Income Tax and £1,045.80 National Insurance, leaving £25,468.20.

Which is better, a sole trader or a limited company?

Neither in general. On 2026/27 rates a sole trader keeps more at £30,000 and £50,000 of profit when all the profit is drawn. A limited company becomes more attractive with higher profits you can leave in the business, real liability risk or clients who require a company.

What are the disadvantages of being a sole trader?

Unlimited personal liability for business debts, all profit taxed as your income in the year it is earned, and some larger clients prefer to contract with companies. Sole traders whose qualifying income was over £50,000 in 2024/25 have had to use Making Tax Digital for Income Tax from 6 April 2026, with lower thresholds following in 2027 and 2028.

How do I change from sole trader to limited company?

Register the company at Companies House (£100 online), set up Corporation Tax and PAYE, open a company bank account, move contracts and client details to the company, deal with VAT registration, and tell HMRC you have stopped self-employment. Start issuing invoices in the company's name from the date it takes over. An accountant can help with transferring assets.

Does a limited company have to show its company number on invoices?

GOV.UK requires the full registered company name on invoices, and the company number, registered office, place of registration and limited status on business letters, order forms and the website. Many companies include the number on invoices as well, which is the simplest way to stay consistent.

Can a sole trader use a business name on invoices?

Yes. Show your own name alongside it, for example "Priya Shah trading as Shah Studio", and give an address where legal documents can be delivered to you. GOV.UK says a sole trader's name must not include "limited", "Ltd", "LLP" or "plc".

Do I need to register for VAT as a sole trader or a company?

The same threshold applies to both: you must register when taxable turnover goes over £90,000 in the last 12 months, or is expected to in the next 30 days. You can register voluntarily below that.