Deciding whether to operate as a sole trader, a limited company director, or remain a PAYE employee is a critical financial decision. Each path has significantly different tax rates, administrative burdens, and corporate benefits.
Sole Trader vs Limited Company vs PAYE
Here is how tax extraction differs between the three major setups:
| Metric | PAYE Employee | Sole Trader | Ltd Company Director |
|---|---|---|---|
| Main Tax Type | Income Tax (PAYE) | Income Tax (Self Assessment) | Corporation Tax + Dividend Tax |
| National Insurance | Class 1 (8% / 2%) | Class 4 (6% / 2%) | No NI on Dividends |
| Liability | None | Unlimited Personal Liability | Limited Corporate Liability |
To run your own net income comparison based on your projected turnover and expenses, use our PAYE vs Self-Employed Calculator.
Frequently Asked Questions (FAQ)
Q: Is self-employment more tax efficient than PAYE?
A: Often yes, because self-employed individuals can deduct business expenses pre-tax, lowering their taxable profits. However, they lose benefits like paid leave.
Q: How do dividends save tax for directors?
A: Dividends are not subject to National Insurance, and the tax rates are lower than standard income tax bands (e.g. 8.75% for basic rate).
Q: What is Corporation Tax for 2026/27?
A: Corporation Tax is 19% on profits up to £50,000, and scales up to 25% on profits over £250,000.
Q: What is IR35?
A: IR35 is legislation designed to prevent disguised employment, forcing contractors to pay standard PAYE rates if their role resembles a traditional job.
Q: Do sole traders pay tax monthly?
A: No, sole traders pay tax twice a year via Payments on Account under Self Assessment, due on January 31st and July 31st.