Sole Trader – is it more tax efficient to incorporate?

Are you thinking of incorporating but not sure if it would be more tax efficient to do so?

The tax rules can be complex and not easy to understand when you are not an accountant, so in this blog we will look at the tax consequences for different levels of profit and savings through incorporating. We will also explain the other factors you need to consider before incorporating.

1.     How much could I save by incorporating if I make a profit of £30,000 ?


The above calculations is based on  2020/21 tax rates and a minimum salary of £8,788, as recommended here.

What does this mean to you? You could save £613 by incorporating. However,  you will also incur additional costs for running a limited company and your  accountancy fees will increase due to additional reporting requirements.

2.     What if your profits increased to say £60,000. Would the results differ?


The savings would be significantly higher and as a general rule the higher the profit the more beneficial it would be to incorporate.

3.   What if your profits are much higher, say £150,000?

As a sole trader, you would lose your personal allowance, as your taxable income exceeds £125,000.

If you incorporate, taking a salary would not make a massive difference due to the  additional costs of running a payroll.

However, as a company director you can chose when to extract profit via dividend. You will only be taxed when the dividend actually arises. This means you can leave the profit in the company and not draw a dividend. Therefore you could save more in tax as opposed to a sole trader, who are taxed on the profit level, regardless of whether they draw the profit down for themselves or not.

We therefore recommend sole traders to consider incorporating if their profit is between £40,000 and £140,000.

The above cases are just for illustration purposes and your circumstances might be different, but we are happy to discuss any further questions you might have.