How sole trader tax calculator works?

⦿ Compare how much you’d take home as a sole trader versus operating through a limited company with this tool.

⦿ Just enter your annual turnover (before VAT and any expenses)

⦿ It will estimate your net income under both setups.

⦿ These figures assume you qualify for the Personal Allowance and will draw a tax-efficient salary from your company.

What is a sole trader?

A sole trader is an individual who owns and operates a business in their own name. The business and the owner are legally the same “person,” so there is no separate legal entity. All profits belong to the owner, and any debts or claims must be met out of the owner’s personal assets. Day-to-day tasks—selling goods or services, keeping records, managing cash, and so on—are normally carried out by the sole trader alone.

Registering as a sole trader in the UK

Signing up is straightforward: open a Government Gateway account on gov.uk and tell HMRC that you’re trading. If you have previously submitted a tax return, you’ll need your 10-digit Unique Taxpayer Reference (UTR). You must register if you:

• receive payment for services,

• make and sell items for profit, or

• earn commission on sales.

What is a limited company?

A limited company is a distinct legal body that is owned by shareholders and run by directors. Because the company exists in its own right, shareholders’ liability is limited to the value of the shares they hold. If the company fails, personal assets are usually protected.

Every limited company must:

1. incorporate with Companies House,

2. have at least one director, and

3. maintain its own bank accounts and statutory records.

Setting up a one-person limited company

Yes—you can be the sole director, sole employee, and only shareholder. Many contractors choose this route to avoid being treated as an employee by clients and to shield themselves from personal liability if something goes wrong.

Main types of limited company

Sole trader vs limited company—tax at a glance

• Sole trader: pays Income Tax and National Insurance on business profits.

• Limited company: company profits are charged Corporation Tax; the owner then pays Income Tax (and possibly Dividend Tax) on any salary or dividends received.

Online calculators can compare your expected take-home pay under each structure—just enter your annual profit (net of VAT and allowable expenses). Assumptions generally include a full UK tax year, the basic Personal Allowance, and no other income.

When might you switch from sole trader to limited company?

Remaining a sole trader keeps costs and paperwork low—ideal while you test or refine a business idea. But as turnover climbs, incorporating can:

• reduce your overall tax burden,

• open up extra funding options (equity as well as loans),

• enhance credibility with clients and suppliers, and

• allow you to put a more tax-efficient workplace pension in place for yourself and any staff.

Pensions

• Sole traders can contribute only to a personal pension.

• Limited company owners may still use a personal pension or set up an employer pension scheme and have contributions treated as a tax-deductible business expense.

Key differences at a glance