The Key Difference
Under PAYE (as an employee or sole trader), all income is subject to income tax and National Insurance at combined rates up to 47% (40% income tax + 7% employee NI at higher earnings). Under a limited company structure, you typically take a low salary (avoiding NI) and supplement with dividends taxed at the lower dividend rates. The company also pays the lower 19–25% corporation tax rate on profits before distribution.
The catch: limited companies have higher running costs (accountancy, Companies House, compliance) and more administrative work. The tax saving must outweigh these costs to justify the structure.
Comparison at Different Income Levels
| Annual Income | Sole Trader Take-Home | Ltd Co Take-Home* | Difference |
|---|---|---|---|
| £30,000 | ~£23,800 | ~£24,600 | ~£800/year |
| £50,000 | ~£36,700 | ~£39,200 | ~£2,500/year |
| £70,000 | ~£46,200 | ~£51,100 | ~£4,900/year |
| £100,000 | ~£60,100 | ~£68,500 | ~£8,400/year |
Source: HMRC / gov.uk · Rates correct for 2025/26 tax year.
*Ltd Co figures assume minimum salary + maximum dividends structure, no retained profit. Approximate figures for illustration; your situation may vary. Use our tax calculator for personalised estimates.
When Does a Limited Company Make Sense?
The crossover point varies depending on accountancy costs and personal circumstances, but most accountants suggest a limited company becomes worthwhile when profits exceed approximately £30,000–£35,000 per year. Below this, the extra complexity and accountancy costs may outweigh the tax saving. Above £50,000, the saving becomes increasingly significant.
Other factors include IR35 status (if contracting through an intermediary), whether you want to retain profits in the company, and whether you need limited liability protection. See Ltd company tax calculator for more.