VanlyYou finish the year on £58,000 profit. Your mate down the pub says he turned limited and saves four grand a year on tax. Your accountant's secretary says give him a call. Your missus says you should probably actually understand what you are signing up to before you sign anything. The missus is right. Here is what running as a sole trader vs limited company actually means for a UK tradesman in 2026, the rough threshold where one starts to pay over the other, and the bits no one tells you up front.
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The short answer, before we go further
Three rules of thumb, before we get into the numbers.
- Under £40,000 profit a year. Stay a sole trader. The tax saving from going limited is not worth the admin cost and the accountant's fee.
- £40,000 to £60,000 profit. It is a draw. Look at the other factors first. Mostly liability and how serious you want the business to look on paper.
- Over £60,000 profit a year. Limited starts to pay you back. The tax saving usually clears the extra accountant fees with money left over.
That is the rough shape of it. The rest of this post explains why those numbers are where they are, what changes when you switch, and the three things tradesmen specifically need to think about that a generic small business guide skips.
How a sole trader pays tax
A sole trader is the simplest setup HMRC will let you operate. You and the business are the same legal entity. The profit the business makes is your income. You file a Self Assessment once a year and pay what you owe by 31 January.
On 2026/27 rates, here is what comes off your profit before you see it.
- Income tax at 20 percent on profits between £12,571 and £50,270
- Income tax at 40 percent on profits between £50,271 and £125,140
- Income tax at 45 percent on profits over £125,140
- Class 4 National Insurance at 6 percent on profits between £12,571 and £50,270
- Class 4 National Insurance at 2 percent on profits over £50,270
If you make £45,000 in profit, you pay roughly £9,300 in income tax and Class 4 NI combined. The rest is yours. No accounts at Companies House. No PAYE. No corporation tax. No board meetings.
One thing changes from April 2026. Making Tax Digital for Income Tax kicks in. If your trade turnover is above £50,000, you will keep digital records and send HMRC a summary every quarter. From April 2027 the threshold drops to £30,000. It is a real admin cost that did not exist before, and it nudges some tradesmen toward going limited sooner. See the HMRC overview of MTD for Income Tax for the official version.
How a limited company pays tax
A limited company is a separate legal entity. You set it up at Companies House for £50. The company makes the money and pays its own tax. You are the director and usually the only shareholder. You take money out two ways.
- A small salary you pay yourself through PAYE, usually around the National Insurance threshold so you do not start paying NI on your own salary.
- Dividends paid out of profit after corporation tax.
On 2026/27 rates, here is what comes off the company.
- Corporation tax at 19 percent on profits under £50,000
- Corporation tax at 25 percent on profits over £250,000
- A sliding rate between those two bands
Then on what you take out personally as dividends.
- Dividend tax at 10.75 percent in the basic rate band (the 2026 rate, up from 8.75 the year before)
- Dividend tax at 35.75 percent in the higher rate band
- The first £500 of dividends is tax free
The split between salary and dividends is where the saving comes from. National Insurance is the difference. As a sole trader you pay Class 4 NI on the whole lot. As a limited company director, you pay corporation tax then dividend tax, with no NI on the dividend slice. That is the engine of the saving.
Where the numbers actually tip
Below is a rough comparison for 2026/27, taking out a typical small salary plus all remaining profit as dividends, no pension contributions, no other quirks. Numbers rounded. Your accountant will get you closer.
| Annual profit | Sole trader take home | Limited company take home | Saving |
|---|---|---|---|
| £30,000 | £24,400 | £24,600 | £200 |
| £45,000 | £35,700 | £36,800 | £1,100 |
| £60,000 | £45,300 | £47,800 | £2,500 |
| £80,000 | £56,000 | £60,500 | £4,500 |
| £100,000 | £66,200 | £72,000 | £5,800 |
Two things to read from that table.
First, under £40,000 the saving is real but small. By the time you have paid an accountant another £600 to £1,200 a year to handle the company accounts, the payroll, and the confirmation statement, you are not better off. You are worse off.
Second, over £60,000 the gap widens fast. At £80,000 profit you are likely £4,000 in front after accountancy fees. That is a holiday a year for the family, or a few months' van payment.
That is just the tax. There are reasons to go limited that have nothing to do with tax. Three of them matter for tradesmen specifically.
What changes for tradesmen specifically
Public liability sits inside the company, not on your house
A sole trader is the business. If someone sues your business, they are suing you personally. If they win, they can come after your house, your van, your savings.
A limited company is its own legal person. If the company gets sued and loses, the company pays. Your personal assets are usually safe, unless you have personally guaranteed something or behaved fraudulently.
This matters more in some trades than others. Domestic decorator working in lived in homes: the risk is real but rare. Roofer working at height, gas engineer signing off boilers, electrician certifying new builds: the risk is bigger and the limited liability is worth real money to you, even before the tax saving kicks in.
You still need proper public liability and professional indemnity insurance either way. The limited company is not a substitute. It is a second layer on top.
CIS applies both ways, with one important wrinkle
If you do any subcontract work for a main contractor, the Construction Industry Scheme applies whether you are a sole trader or a limited company. The contractor deducts 20 percent from your invoices and sends it to HMRC on your behalf. You claim it back when you file your accounts.
The mechanics are the same. The cash flow is the same. CIS is not a reason to choose one structure over the other, despite what some forum threads will tell you.
The wrinkle: limited companies tend to clear the qualifying turnover threshold for gross payment status more cleanly. Gross status means contractors pay you in full and you settle the tax later. For a busy subbie that is real cash flow, £6,000 to £10,000 sat in your account instead of HMRC's at any given moment.
Looking serious on paper
Some main contractors only sub to limited companies. Some developers will not quote you unless you are a limited company. Partly snobbery, partly insurance driven (limited companies are easier to chase if something goes wrong, ironically).
If your work is mostly domestic, this does not matter. If you want to bid for new build, commercial fit out, or council work, going limited opens doors that stay shut to sole traders.
The admin cost most tradesmen do not budget for
This is where most pub conversations skip ahead too fast. Going limited adds work. Real work. Here is what gets added to your year.
- Annual accounts filed at Companies House (deadline 9 months after year end)
- Corporation tax return filed with HMRC (12 months after year end, paid at 9 months and a day)
- Confirmation statement filed at Companies House (annually, £34 fee, takes 15 minutes)
- PAYE filed monthly with HMRC for the salary you take
- Dividend vouchers and board minutes recorded every time you take money out of the company
- A separate business bank account (most banks will refuse to let a limited company use a personal current account)
- VAT returns if you cross the £90,000 threshold, but that applies to sole traders too
In practice, this means an accountant. Not a Sunday afternoon doing it yourself. A proper accountant who knows the trade. Budget £900 to £1,800 a year for a one person limited company doing it properly. Bigger fees if you have payroll for staff.
You also need cleaner records. Not just because the accountant charges more if your books are a shoebox. As a company director you have legal duties HMRC takes seriously, and getting it wrong costs penalties on top of any tax.
The admin pile grows for the limited company tradesman. More invoices to send on time, more late payers to chase, more deadlines stacked behind the ones losing you Sundays already. Vanly handles the parts that do not need an accountant: invoice the day you finish the job, chase slow payers in your own voice, weekly summary in your WhatsApp on a Friday. The accountant still does the accounts. Vanly keeps the records clean.
How to actually switch
You do not technically switch. You set up a new company, then move the trade across. Three things have to happen.
- Set up the company at Companies House. £50, takes about 20 minutes online. Pick the SIC code that matches your trade (43.21 for electricians, 43.22 for plumbers and gas, 43.99 for other specialist trades).
- Open a business bank account in the company name. Allow two weeks. Tide and Starling are quick. Mainstream banks are slow.
- Tell HMRC, your customers, your insurer, and the CIS scheme. Update your invoices to the new company name and number. Old work invoiced before the switch stays sole trader. New work after the switch is the company.
The boring detail: you keep filing Self Assessment for the year you switched, covering the sole trader portion. Your accountant will sort it.
Realistic timeline: from the day you decide to go limited, to the day everything is running through the company, three weeks if you push it. Six weeks if you do not. Pick a date that is the start of a tax year (6 April) or the start of a calendar quarter if you can. It makes everyone's life easier.
When sole trader is still the right call
A short list, because plenty of trades do not need a company.
- Profits under £40,000 and likely to stay there
- Work is purely domestic, low value, low risk
- You hate paperwork, and you would rather lose £1,000 a year in tax than file extra forms
- You are within two years of retiring or stepping back
The simplest setup that does the job is usually the right one. Going limited because someone in the pub said so, then drowning in admin you hate, is not a win.
FAQ
What is the threshold where most UK tradesmen should go limited?
Roughly £60,000 of annual profit, give or take. Below £40,000 the admin cost eats the tax saving. Between £40,000 and £60,000 it is a coin flip and other factors (liability, how your customers see you) matter more than the tax.
Can I switch back from limited to sole trader if it does not work out?
Yes, but it is painful. You close the company down (members' voluntary liquidation, or strike off), settle outstanding tax, and start trading as a sole trader again. Three to six months of faff. The lesson: do not go limited before you need to.
Does CIS work differently for limited companies?
The deduction is the same (20 percent for registered, 30 percent for unregistered). The difference is gross payment status. Limited companies tend to clear the qualifying turnover threshold more cleanly, and with gross status you get paid in full and settle your tax later. For a busy subbie that is meaningful cash flow.
Will I need an accountant?
If you are a sole trader earning under the basic rate band and your books are tidy, you can do your own Self Assessment. From April 2026, MTD for Income Tax makes that harder. If you are a limited company, you really do need an accountant. The penalties for getting it wrong are bigger than the saving from doing it yourself.
How does Making Tax Digital affect this decision in 2026?
MTD for Income Tax starts in April 2026 for sole traders with turnover over £50,000. It adds quarterly digital filings on top of the annual Self Assessment. Limited companies are not in scope yet (MTD for Corporation Tax is delayed beyond 2026). For a tradesman near the threshold, MTD nudges the sums slightly in favour of going limited, because the admin gap closes.
Does Vanly help with the admin either way?
Yes. Vanly handles the daily admin: invoice the day you finish the job, chase late payers in your own voice, drop a Friday summary in your WhatsApp. It does not replace your accountant. Sole trader or limited company, the day to day paperwork still gets done. See what AI actually does for a tradie business in 2026 for the honest list of what is in scope and what is not.
You do not have to decide today. Most tradesmen would do well to stay a sole trader until the profit clearly justifies the move, then switch on a clean date with an accountant who knows the trade. Whichever way you go, the daily admin does not change shape. Invoices need sending. Late payers need chasing. Leads need answering. Try Vanly free for 14 days and let the daily admin run itself while you work out the rest.