How sole trader tax works
Subtract expenses from turnover and the profit faces two charges. Income Tax at 20% from £12,571 to £50,270, 40% from £50,271 to £125,140, and 45% above, after the £12,570 Personal Allowance — see the current rates on GOV.UK. On top sits Class 4 National Insurance: 6% on profits from £12,570 to £50,270 and 2% above, per the current rates on GOV.UK. Class 2 needs no payment once profits reach the £7,105 Small Profits Threshold — it is treated as paid, protecting the State Pension record; below that, voluntary Class 2 costs £3.65 a week. And expect payments on account: when the Self Assessment bill passes £1,000, HMRC collects half of next year's bill in advance each January and July.
Formula (sole trader): profit = turnover − expenses; Income Tax on (profit − £12,570) at 20/40/45; Class 4 at 6%/2%; take-home = profit − both.
How the limited-company route works
The standard contractor model draws a small salary and takes the rest as dividends. This calculator uses a £12,570 salary (covered by the Personal Allowance, so no Income Tax on it), charges corporation tax on profit after salary — 19% up to £50,000, marginal relief between £50,000 and £250,000, 25% above, per the GOV.UK rates — then taxes the drawn dividends at 10.75% basic, 35.75% higher, 39.35% additional above the £500 dividend allowance, per GOV.UK's dividends guide. What it deliberately leaves out: employer National Insurance, VAT, IR35 status effects, and accountancy costs — all of which move the real answer, which is why this page compares structures rather than filing your return.
Formula (limited, simplified): CT on (profit − £12,570 salary) at 19%/marginal/25%; distributable = profit − salary − CT; dividends taxed at 10.75/35.75/39.35 above £500; take-home = salary + dividends − dividend tax.
Worked example: £60,000 turnover, £5,000 expenses
Profit is £55,000. Sole trader: Income Tax is 20% × £37,700 = £7,540 plus 40% × £4,730 = £1,892, totalling £9,432; Class 4 is 6% × £37,700 = £2,262 plus 2% × £4,730 = £94.60, totalling £2,356.60; combined £11,788.60, leaving £43,211.40. Limited: corporation tax at 19% on (£55,000 − £12,570) = £8,061.70; distributable £34,368.30 drawn as dividends, taxed at 10.75% above £500 = £3,640.84; take-home £12,570 + £34,368.30 − £3,640.84 = £43,297.46. Verdict: limited wins by £86.06 — essentially a tie, which is itself the lesson of this page.
Limited does not always win anymore
Run £75,000 of profit through both sides and the answer flips: the sole trader keeps £54,811.40 while the limited route keeps £53,939.91 — sole trader ahead by £871.49. The mechanism is the post-2023 double layer: marginal corporation tax at an effective 26.5% in the taper band plus higher-rate dividend tax at 35.75% outweighs the single income-tax-plus-NIC layer once profits push well into the higher band. The old rule of thumb ("always go limited past £30k") predates the 25% main rate and the dividend-tax rises — at 2026/27 rates the crossover sits far higher than folklore claims, and near the boundary the right answer is genuinely either. That is why the calculator exists: run your own profit, not someone else's rule.
Which structure, beyond the tax
Tax is one input among several. Limited companies bring limited liability, a more corporate face for enterprise clients, and extra admin (accounts, confirmation statement, payroll even for one director). Sole traders get simplicity: register with HMRC, file Self Assessment, keep records — the GOV.UK working-for-yourself guide covers the obligations. IR35 can override the whole comparison for contractors working like employees. And anyone inside the UK day-rate market should sanity-check the profit input against reality first: the UK freelance rates guide benchmarks the £407 average day rate this calculator's turnover implies. Structure choice is education here, not advice — confirm yours with an accountant before registering anything.
Sources
Income Tax bands and Personal Allowance: GOV.UK. Class 2/Class 4 National Insurance: GOV.UK. Dividend rates and allowance: GOV.UK. Corporation Tax tiers and marginal relief: GOV.UK. Self-employment registration and records: GOV.UK. Modelled for trading profits up to £100,000; above that the £100,000 Personal Allowance taper applies — see an accountant.
Every figure above is hand-checked: the worked example was recomputed independently of the calculator code, and tax figures track 2026/27 GOV.UK rates. How we check every page.
Related calculators
The comparison needs a profit input grounded in reality: the freelance rates by country tool benchmarks UK rates globally, the day rate converter turns a target salary into the day rate that funds it, and the UK freelance rates guide carries the £407 benchmark plus the Class 2/Class 4 detail behind this page's National Insurance line.