The structure question changed on 6 April 2026, when the ordinary and upper dividend rates each rose two percentage points. It has also always had a CIS dimension that general advice misses entirely: a company recovers its CIS deductions monthly against PAYE, while a sole trader waits until after the tax year ends. For a labour-only subcontractor that timing difference can matter more than the tax rate.
Guide · Updated August 2026
| Item | 2026/27 |
|---|---|
| Personal allowance | £12,570 |
| Basic rate | 20% on the first £37,700 of taxable income |
| Higher rate | 40% from £37,701 to £125,140 |
| Additional rate | 45% above £125,140 |
| Higher rate threshold with full allowance | £50,270 |
| Personal allowance taper | Reduced £1 for every £2 of income over £100,000 |
| Class 4 NIC main rate | 6% on profits between £12,570 and £50,270 |
| Class 4 NIC additional rate | 2% above £50,270 |
| Small Profits Threshold | £7,105 |
| Voluntary Class 2 weekly rate | £3.65 |
Two things about Class 2 that people still get wrong. It is no longer a mandatory charge. Where profits are at or above the Small Profits Threshold of £7,105, Class 2 is treated as having been paid — the National Insurance record is protected automatically with nothing to pay. Below £7,105 you can pay voluntarily at £3.65 a week to protect the record, and for a trade having a bad year that is worth doing rather than losing a qualifying year.
The threshold freeze matters for a growing trade business. The personal allowance and the £37,700 basic rate limit are maintained to 5 April 2031 — the freeze was extended by three further years at Budget 2025. So every year of price increases moves more of your profit into higher rate without the thresholds moving to meet it.
Income tax figures above are for England, Wales and Northern Ireland. Scotland has its own rates and bands on non-savings income, and a Scottish trade should have the calculation done on Scottish rates rather than these.
| Item | FY2026 |
|---|---|
| Main rate | 25% |
| Small profits rate | 19% |
| Marginal relief lower limit | £50,000 |
| Marginal relief upper limit | £250,000 |
FY2026 (1 April 2026 to 31 March 2027) is unchanged from FY2025. Marginal relief applies between £50,000 and £250,000, producing an effective rate above 25% on the slice in between.
Associated companies is the detail that catches trade groups. The limits are divided by the number of associated companies plus one. HMRC's own worked example: three associated companies means dividing by four, giving a lower limit of £12,500 and an upper limit of £62,500. Limits are also reduced proportionately for accounting periods shorter than twelve months. So a builder with a trading company, a plant company and a property company has pushed all three into marginal relief territory much earlier than a single company would be.
| Rate | To 5 April 2026 | From 6 April 2026 |
|---|---|---|
| Ordinary (basic rate) | 8.75% | 10.75% |
| Upper (higher rate) | 33.75% | 35.75% |
| Additional | 39.35% | 39.35% — unchanged |
| Dividend allowance | £500 | £500 |
Two percentage points on the ordinary and upper rates, with the additional rate untouched. Two points does not sound like much until it is applied to a full year of drawings: on £40,000 of dividends in the basic and higher bands it is roughly £800 a year of extra personal tax, every year, for the same work.
This narrows the classic salary-plus-dividends advantage without eliminating it, and it moves the crossover point at which incorporation starts to pay. It also means any comparison you were shown before Budget 2025 is now out of date.
A trade business makes £70,000 of profit before the owner's own reward, and the owner needs to draw all of it.
As a sole trader. Taxable profit £70,000. Income tax: nil on the £12,570 personal allowance, 20% on £37,700 = £7,540, then 40% on the remaining £19,730 = £7,892. Income tax £15,432. Class 4 NIC: 6% on £37,700 = £2,262, plus 2% on £19,730 = £395 — £2,657. Total £18,089, an effective rate of about 25.8%.
As a company paying a £12,570 salary and the rest as dividends. Corporation tax on £57,430 at 19% (below the £50,000 lower limit is 19%; between £50,000 and £250,000 marginal relief applies, so the effective rate here is a little above 19%) — call it approximately £11,200 after marginal relief. That leaves roughly £46,200 of distributable profit. Dividend tax at 10.75% and 35.75% across the bands, after the £500 allowance, comes to roughly £10,900. Combined total in the region of £22,100.
On these numbers, in this year, at this profit level and drawing everything, the sole trader is ahead. That is a change in emphasis from a few years ago, and the two-point dividend rise is a large part of why.
These are illustrative figures to show the shape of the comparison, not a computation for your business — employer NIC on the salary, the £10,500 Employment Allowance where available, retained profits, pension contributions, and the CIS timing point below all move the answer, sometimes decisively. The structure service page is where we run it properly on your numbers.
What genuinely shifts the balance towards a company:
How you recover CIS deductions depends entirely on structure, and for a labour-only subcontractor this is often the deciding factor.
A sole trader or partnership reports CIS on the self-employment or partnership pages. The deductions are advance payments of income tax and Class 4 NIC, set against the Self Assessment liability with any excess repaid — after the tax year ends. Suffered continuously, recovered once.
A company cannot claim CIS on its corporation tax return. It offsets in-year, monthly, through the RTI employer payment summary, against PAYE tax due, NIC due, student loan repayments due, and CIS it has deducted from its own subcontractors. Excess at year end can be refunded or set against corporation tax. No in-year repayments or other set-offs are permitted except in liquidation or administration.
So a company with a payroll gets its CIS back monthly, which is a substantial cash-flow advantage. A company without much of a payroll gets the worst of both: it cannot claim on the CT return, and it has too little PAYE to absorb the deductions, so the money sits until after 5 April anyway. That is the trap — incorporating a labour-only subcontractor with a £12,570 director's salary and no other staff does not fix the CIS cash problem. Gross payment status fixes it in either structure, and the cash-flow guide works the numbers through.
A company files annual accounts and a corporation tax return, runs a payroll if it pays a salary, maintains a register of people with significant control, and files a confirmation statement. Since 18 November 2025 identity verification at Companies House is a legal requirement for directors and persons with significant control, and — this is the operative part — a company cannot file its confirmation statement unless all its directors are verified. Each verified individual gets a personal code that must be provided in the next confirmation statement filing, with PSCs having a 14-day window to supply theirs. Failure to verify can bring prosecution, court fines or financial penalties, and bars a person from becoming a new director or registering new companies.
None of that is a reason not to incorporate. It is a reason to incorporate deliberately rather than because somebody on a site said limited companies pay less tax.
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Less automatically than a few years ago. The ordinary and upper dividend rates each rose two percentage points on 6 April 2026, to 10.75% and 35.75%, which narrows the salary-plus-dividends advantage and moves the profit level at which incorporation starts to pay. On around £70,000 of profit with everything drawn out, a sole trader is often now the cheaper structure on tax alone. A company still wins where profits are retained rather than drawn, where employer pension contributions matter, where limited liability is the real objective, or where there is a payroll big enough to absorb CIS deductions monthly rather than waiting for the year end.
The ordinary rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75% on 6 April 2026, both a two percentage point increase announced at Budget 2025. The additional rate is unchanged at 39.35%, and the dividend allowance stays at £500. On £40,000 of dividends spread across the basic and higher bands, the increase costs roughly £800 a year of extra personal tax for exactly the same work. It applies to every director-shareholder taking dividends, so any structure comparison prepared before Budget 2025 understates the cost of a company and should be re-run.
It can, but only if it has a payroll. A company cannot claim CIS deductions on its corporation tax return at all; it offsets them in-year and monthly through the RTI employer payment summary against PAYE due, NIC due, student loan repayments and CIS deducted from its own subcontractors. Any excess at the tax year end is then refunded or set against corporation tax. A sole trader instead sets deductions against the Self Assessment liability after the year ends. So a company with real staff recovers monthly, while a company with just a director's salary has too little PAYE to absorb the deductions and waits anyway — which is why incorporating alone does not fix the CIS cash problem.
For corporation tax, the £50,000 lower limit and £250,000 upper limit for marginal relief are divided by the number of associated companies plus one. HMRC's own example is three associated companies, meaning division by four, which cuts the lower limit to £12,500 and the upper limit to £62,500. So a builder running a trading company alongside a plant company and a property company pushes all three into marginal relief far earlier than a single company would reach it, paying an effective rate above 19% on profits that would otherwise have qualified for the small profits rate. The limits are also reduced proportionately for accounting periods shorter than twelve months.
Not as a mandatory charge. Where your profits are at or above the Small Profits Threshold of £7,105 for 2026/27, Class 2 contributions are treated as having been paid, so your National Insurance record is protected automatically with nothing to hand over. Below £7,105 you can pay voluntarily at £3.65 a week, and for a trade having a lean year that is usually worth doing rather than losing a qualifying year towards the State Pension. Class 4 is separate and still charged: 6% on profits between £12,570 and £50,270, then 2% above £50,270.
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