Sole Trader or Limited Company? The 2026/27 Break-Even Point in Scotland

Written by James Veal

Many self-employed people in Scotland ask the same question: at what profit does it make sense to become a limited company? The old rule of thumb was around £30,000 to £40,000. However, since the 2026 dividend tax rise, and because running a company has real costs, the answer is now higher. For example, we compare take-home pay at several profit levels for 2026/27, and we list the extra costs you would take on.

Please note: every figure in this article is a guide only. Real results can vary widely depending on your circumstances, including your other income, how much you take out of the business, your expenses, pension contributions, whether you employ anyone, and future changes to tax rates. This is general information, not personalised tax advice.

The Short Answer

For a Scottish business owner who takes most of the profit out as personal income, a limited company only starts to come out ahead at roughly £53,000 to £59,000 of annual profit. Even at its best, however, the saving is typically only around £1,000 a year. As a result, below roughly £50,000, staying a sole trader is usually simpler and cheaper.

For the general pros and cons beyond tax, see our guide to Sole Trader vs Limited Company. This article focuses on the numbers.

What Changed for 2026/27

• Dividend tax rose to 10.75% (basic rate) and 35.75% (higher rate). The £500 dividend allowance is unchanged, but the higher rates mean taking profit as dividends now costs more. See HMRC’s guidance on tax on dividends.
• Scottish Income Tax starter and basic bands were widened by 7.4%, and the 42% higher rate still starts at £43,663. Scottish bands apply to a sole trader’s profit and to any salary your company pays you, but dividends are taxed at UK rates, so the two systems interact. See our Scottish Tax Rates for 2026-2027 guide and the GOV.UK Scottish Income Tax guide.
• Employer’s National Insurance is 15% on salary above £5,000.
• Corporation Tax is 19% on profits up to £50,000, rising to 25% above £250,000, with marginal relief in between (see HMRC’s Corporation Tax rates).
• Class 4 National Insurance for sole traders is 6% on profits between £12,570 and £50,270.
• Making Tax Digital quarterly reporting applies to sole traders with turnover above £50,000 from April 2026, which narrows the admin gap between the two structures.

Sole Trader vs Limited Company: Estimated Take-Home Pay

The table below shows approximate yearly take-home pay after all tax. It assumes a Scottish taxpayer with no other income, a single director paid a £12,570 salary with the rest taken as dividends, no employees, sole trader accountancy of about £500 a year and total limited company running costs of about £1,550 a year (so roughly £1,050 more than a sole trader).

Annual profit	Sole trader (approx.)	Limited company (approx.)	Limited company advantage
£30,000	£25,140	£23,280	−£1,860
£40,000	£32,440	£30,510	−£1,930
£50,000	£38,510	£37,740	−£770
£55,000	£41,280	£41,360	+£80
£60,000	£44,080	£44,970	+£890
£65,000	£46,880	£47,940	+£1,060
£70,000	£49,680	£50,310	+£630
£80,000	£55,150	£55,030	−£110
£100,000	£65,750	£64,480	−£1,270

A negative number means you would be better off as a sole trader. However, the company’s advantage peaks in the mid-£60,000s and then fades, because dividends are taxed at 35.75% once you pass the higher-rate threshold.

The break-even point also depends on how much the company costs to run in total, compared with about £500 a year for a sole trader:

Total limited company running costs per year	Approximate break-even profit
£1,100	£52,750
£1,550	£54,750
£2,000	£56,750
£2,500	£59,000

These figures assume you take all the profit out each year. If you leave profit in the company, it is taxed at 19% to 25% instead. However, that is a deferral rather than a saving, because you pay personal tax when you eventually take the money out.

What the Figures Include, and What They Don’t

The calculations include corporation tax, dividend tax, Scottish Income Tax, employer’s National Insurance on the director’s salary, and a typical limited company accountancy fee (about £1,500) plus the £50 Companies House confirmation statement. They do not separately price the one-off setup costs, registered office service, bank charges, extra software, penalties or the time you spend on admin. Some of those may be covered by your accountant’s fee. However, any that are not will push the break-even point higher, towards the lower rows of the table above.

Every Additional Cost of Being a Limited Company

These are the costs and obligations that sit on top of what a sole trader already faces. In short, some are cash costs and some are time.

One-off costs

• Company registration with Companies House (currently around £100 online; check their site for the latest fee).
• Registered office address. Your address appears on the public register, so some owners pay for a registered office service instead.
• Company bank account setup, and changing supplier, customer and insurance details.
• Transferring existing assets such as equipment and goodwill into the company, which can carry tax implications.
• Updating branding and paperwork: invoices, website and contracts must show the company name, number and registered address.

Annual costs

• Higher accountancy fees. Limited company accounts typically cost in the region of £1,000 to £2,000 a year, compared with roughly £600 to £1,200 for a sole trader. VAT or payroll for staff pushes this higher.
• Statutory annual accounts filed at Companies House, prepared to a set format.
• Company Tax Return (CT600) filed with HMRC each year.
• Confirmation statement at Companies House: £50 online (£110 on paper).
• Director payroll. Even if you are the only employee, you need to run PAYE, submit real-time reports to HMRC and keep payroll software or pay for it to be done.
• Employer’s National Insurance at 15% on any salary above £5,000. A one-director company with no other employees generally cannot claim Employment Allowance.
• Your personal Self Assessment return is still required, now covering salary and dividends.
• Dividend paperwork. Dividends must be properly declared and recorded with board minutes and dividend vouchers, and can only be paid from available profits.
• Accounting software and bookkeeping. You will need clean, separate business records and a business bank account.
• Business bank account charges, where your bank applies monthly fees.
• Insurance. Limited liability does not remove the need for public liability, professional indemnity or employer’s liability cover, and directors may want directors’ and officers’ cover.
• Pension auto-enrolment duties if you take on staff.
• Identity verification for directors and people with significant control, now required before a confirmation statement can be filed.

Hidden and ongoing costs

• Time and admin. Keeping statutory registers up to date, filing on time and keeping business and personal money strictly separate all take hours each year.
• Late filing penalties. Companies House applies automatic penalties for late accounts, and HMRC charges for late CT600 returns.
• Directors’ loan accounts. Taking money out that is not salary or a properly declared dividend can create tax charges, so withdrawals need tracking.
• Benefits in kind. Personal use of company assets can create extra tax and reporting duties.
• Corporation Tax timing. Tax is due nine months and one day after your year end, which needs cash set aside in advance.
• Winding up. Closing a company properly has its own costs and procedures, unlike simply ceasing to trade as a sole trader.

When Going Limited Can Still Make Sense Below Break-Even

Tax is not the only reason to incorporate. Some owners choose a company for:

• Limited liability. The business is a separate legal entity, so your personal assets are generally better protected if things go wrong, although personal guarantees and director duties still apply.
• Credibility. Some corporate and public sector customers prefer or require a limited company.
• Retaining profit. If you do not need to draw all the profit, leaving it in the company defers personal tax.
• Pension planning. Employer pension contributions through a company can be tax-efficient.
• Succession and growth. A company is easier to bring other owners or investors into.

When Staying a Sole Trader May Be Better

• Your profit is below roughly £50,000 and you draw most of it.
• You want simple records and low accountancy costs.
• You value privacy, since limited company director details are public.
• You are just starting out and unsure how the business will grow.

Important Limits of These Figures

The figures above are simplified estimates. They do not account for other income such as employment or rental income, pension contributions, student loan repayments, the High Income Child Benefit Charge, shareholder arrangements involving a spouse or partner, VAT, capital allowances, losses, staff, or changes announced in future Budgets. Tax rates and thresholds can change, and costs vary widely between accountants and businesses. Treat everything here as a starting point for a conversation, not a recommendation.

Want Figures Based on Your Own Business?

If you are weighing up incorporation, PBAS can model your actual profit, drawings and other income side by side, so you can see what the change would really mean for you before committing.

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Frequently Asked Questions

At what profit does a limited company become cheaper than being a sole trader?

On 2026/27 rates, for a Scottish taxpayer taking all profit out as personal income, the break-even point is roughly £53,000 to £59,000 of annual profit, depending on your running costs. These figures are a guide only and vary with your circumstances.

Do Scottish tax rates change the answer?

Yes. Scottish Income Tax bands apply to a sole trader’s profit and to a director’s salary, but dividends are taxed at UK-wide rates. That gives a company a small edge in the £55,000 to £75,000 profit range compared with the same comparison elsewhere in the UK.

Is it worth going limited just for liability protection?

It can be, especially if your work carries financial or professional risk. Limited liability separates your personal assets from the business in most circumstances, but it does not remove the need for insurance, and personal guarantees can still apply.

Can I switch from sole trader to limited company later?

Yes, you can incorporate at any time. Moving assets and goodwill into the company can have tax consequences, so take advice before you make the change.

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Need Help with This?

PBAS provides affordable bookkeeping and accountancy services for sole traders and small businesses across East Lothian, Edinburgh, Midlothian and throughout Scotland. If you’d like a hand with your accounts, self assessment or any tax matter, get in touch for a free, no-obligation chat.

• Sole Trader vs Limited Company: Which Is Right for You?
• Scottish Tax Rates for 2026-2027
• How to Budget for Your Tax Bill as a Sole Trader

This article provides general guidance only, and all figures are estimates for the 2026/27 tax year that may change. For specific advice on your circumstances, consult HMRC directly via the GOV.UK guide to setting up a limited company or speak to a qualified accountant.