Uses optimal director salary of £12,570 (primary threshold, nil employer NI at this level pre-April 2025 basis; note April 2025 changes shown). Remainder taken as dividends.
Sole Trader
Limited Company
The crossover point marks the profit at which limited company operation produces a higher net take-home. This assumes £1,800 ltd overhead per year.
Frequently asked questions
The crossover point depends on your circumstances, but for most people extracting all profits as salary plus dividends, incorporation starts to save tax at profits above roughly £30,000 to £35,000 per year. The saving arises from paying corporation tax at 19% rather than income tax at 40%, combined with taking dividends taxed at 10.75% rather than income taxed at 40%.
Yes, subject to limits. A limited company is a separate legal entity and your personal liability is limited to any unpaid share capital (usually £1). If the company cannot pay its debts, creditors generally cannot pursue your personal assets. However, this protection can be lost if you give personal guarantees on business debts, trade while insolvent, or engage in wrongful trading.
Yes, considerably. As a sole trader you have no filing obligations with Companies House, no requirement for formal accounts, simpler tax returns via self assessment, and no need to separate business and personal finances legally. A limited company requires annual accounts, a corporation tax return, a confirmation statement, PAYE registration for the director salary, and potentially quarterly VAT returns.
Yes, though you should notify clients and update contracts, invoices, and bank details. Existing contracts may need novating to the new company. If you are VAT-registered as a sole trader you will need to register the limited company separately. There can also be capital gains tax implications if you transfer assets, so it is worth taking advice before transferring valuable intellectual property or equipment.
No, there is no legal requirement to pay yourself a salary. However, most directors pay themselves a small salary up to the NI secondary threshold (£5,000 from April 2025) to maintain qualifying years for state pension without triggering employer NI. The remaining profits are then drawn as dividends, which are not subject to NI.