Should I disincorporate my limited company and become a sole trader?

Should I disincorporate my limited company and become a sole trader?

A 2026/27 tax comparison, plus the legal and practical issues to consider before moving the trade into your own name.
For many years, business owners were often told that operating through a limited company was automatically the most tax-efficient option.

That is no longer a safe assumption.

Changes to Corporation Tax, dividend tax and employer’s National Insurance mean that the tax saving from a company can be small at modest profit levels. In some cases, a sole trader may retain more cash.

However, tax is only one part of the decision. A limited company is a separate legal person. It may own the business assets, employ the staff, hold contracts, owe money and carry commercial risk. Moving the trade back into your own name can therefore be much more complicated than simply telling HMRC that you are now self-employed.

This guide looks at a simplified 2026/27 tax comparison and then considers the wider legal and practical issues.

The starting point: compare like with like
Suppose a company generates £42,570 before paying its owner.
The company pays the director a salary of £12,570. This leaves £30,000 of profit after salary but before employer’s National Insurance and any pension contribution.

A sole trader cannot deduct their own drawings as an expense. The equivalent sole-trader profit is therefore the full £42,570 – not £30,000.
Profit before paying the owner: £42,570.00 for both the limited company and the sole trader.
Director’s salary / owner’s drawings: £12,570.00 salary for the limited company. For the sole trader, drawings are not deductible.
Profit after salary: £30,000.00 for the limited company. This is not applicable for the sole trader.
Taxable trade profit before other adjustments: £30,000 less employer’s National Insurance for the limited company, compared with £42,570.00 for the sole trader.

This distinction is essential. Comparing £30,000 of company profit after salary with £30,000 of sole-trader profit would not compare the same economic activity.

Assumptions used in the example

– The calculations below assume:
– The individual is resident in England, Wales or Northern Ireland-
– They have no other income, benefits, student loan or tax adjustments
– They are below State Pension age
– The company has no associated companies
– All available post-tax company profit is paid as a dividend
– The company is a one-director company and cannot claim Employment Allowance
– The director’s salary is £12,570
– Employer’s National Insurance is 15% above the £5,000 Secondary Threshold
– The Corporation Tax small profits rate is 19%
– The dividend allowance is £500 and the ordinary dividend rate is 10.75%
– Sole-trader Class 4 National Insurance is 6% between £12,570 and £50,270
– The personal pension uses relief at source
– The figures ignore accountancy fees, software, company formation or closure costs, benefits, other reliefs and timing differences

The example is deliberately simplified. A spouse’s income, other employees, associated companies, losses, benefits, Child Benefit, student loans or other income could change the result.

Scenario one: no pension contribution
The company pays a salary of £12,570. There is no employee’s National Insurance or PAYE at this salary, based on the assumptions above. However, the company pays employer’s National Insurance of £1,135.50 because the Secondary Threshold is only £5,000.

Calculation – Limited company – Sole trader
Profit before owner remuneration – £42,570.00 – £42,570.00
Salary deducted by company – (£12,570.00) – –
Employer’s National Insurance – (£1,135.50) – –
Company taxable profit – £28,864.50 – –
Corporation Tax at 19% – (£5,484.26) – –
Dividend available – £23,380.25 – –
Dividend tax – (£2,459.63) – –
Income Tax on sole-trader profit – – – (£6,000.00)
Class 4 National Insurance – – – (£1,800.00)
Cash retained personally – £33,490.62 – £34,770.00

Conclusion without a pension
On these assumptions, the sole trader retains approximately £1,279.38 more cash for 2026/27.
The company is not tax-free simply because the salary is covered by the Personal Allowance. The business also bears employer’s National Insurance and Corporation Tax, while the shareholder pays dividend tax when the remaining profit is extracted.
This does not mean every company at this profit level should close. It means the tax advantage alone may not be sufficient reason to remain incorporated.

Scenario two: £5,000 goes into a pension
To make the pension comparison fair, both routes place £5,000 into the pension pot.
For the limited company, we assume the company pays a £5,000 employer contribution directly into the director’s registered pension scheme. We assume the contribution is allowable for Corporation Tax and within the director’s pension allowances.
For the sole trader, we assume a £5,000 gross personal contribution under relief at source. The sole trader pays £4,000 and the pension provider claims £1,000 of basic-rate tax relief from HMRC.
At this income level, the sole trader is already wholly within the basic-rate band. The pension contribution therefore does not generate further higher-rate relief, and it does not reduce Class 4 National Insurance.

Calculation – Limited company – Sole trader
Profit before owner remuneration – £42,570.00 – £42,570.00
Salary deducted by company – (£12,570.00) – –
Employer’s National Insurance – (£1,135.50) – –
Employer pension contribution – (£5,000.00) – –
Company taxable profit – £23,864.50 – –
Corporation Tax at 19% – (£4,534.26) – –
Dividend available – £19,330.25 – –
Dividend tax – (£2,024.25) – –
Income Tax on sole-trader profit – – – (£6,000.00)
Class 4 National Insurance – – – (£1,800.00)
Personal amount paid into pension – – – (£4,000.00)
Cash retained personally – £29,875.99 – £30,770.00
Amount in pension – £5,000.00 – £5,000.00
Cash plus pension value – £34,875.99 – £35,770.00

Conclusion with a £5,000 pension pot
On these assumptions, the sole-trader route produces approximately £894.01 more combined cash and pension value.
However, the company contribution is still efficient. The director gives up only about £3,614.63 of immediate personal cash to place £5,000 into the pension, because the contribution reduces Corporation Tax and the dividend tax that would otherwise arise.
If the sole trader pays £5,000 from their own bank account rather than £5,000 gross, the pension provider would normally add basic-rate relief and the pension pot would receive £6,250. That is a different comparison.

Summary of the worked example

2026/27 outcome – Limited company – Sole trader – Sole-trader advantage
No pension: personal cash – £33,490.62 – £34,770.00 – £1,279.38
£5,000 pension: personal cash – £29,875.99 – £30,770.00 – £894.01
£5,000 pension: cash plus pension – £34,875.99 – £35,770.00 – £894.01

The figures show why incorporation should be reviewed rather than assumed. At this level of profit, the sole trader is ahead in both simplified examples.

The result could change if:
– The company qualifies for Employment Allowance
– Profits are left in the company rather than fully withdrawn
– The business owner has other income
– A spouse or civil partner genuinely works in or owns part of the business
– The company makes larger employer pension contributions
– There are benefits, loans, losses or associated companies
– Scottish Income Tax rates apply
– The business has different administration and professional costs

Why businesses use limited companies
If a sole trader appears to pay less tax, why remain incorporated?

Limited liability
A company is legally separate from its shareholders and directors. In normal circumstances, the company’s debts belong to the company rather than the shareholder personally.
Limited liability is not absolute. Directors can still become personally liable through personal guarantees, wrongful conduct, certain breaches of duty or debts they accept personally. Nevertheless, incorporation can provide an important layer of protection where the business has employees, vehicles, premises, significant contracts or the possibility of customer claims.
As a sole trader, there is no legal separation between you and the business. Business liabilities are personal liabilities, and personal assets may be exposed if the business cannot pay.

Contracts and customer requirements
Some customers, agencies, landlords, lenders or suppliers prefer or require a limited company. Larger organisations may only contract with incorporated suppliers.
Existing contracts may be in the company’s name. Moving to sole trade could require consent or formal novation, and the other party may use the opportunity to renegotiate terms.

Ownership and succession
A company can have more than one shareholder, issue different classes of shares and continue despite a change in ownership. This can make it easier to bring in another owner, reward key people, transfer control gradually or sell the business through a share sale.
A sole trade belongs to one individual. Bringing in another owner normally means forming a partnership, LLP or company and transferring the business again.

Retaining profit
A sole trader pays Income Tax and Class 4 National Insurance on the full taxable profit, whether or not the money is withdrawn.
A company pays Corporation Tax on its profit, but the shareholder may defer personal dividend tax by leaving some post-tax profit in the company. This can be useful where profits exceed the owner’s immediate spending needs, although investment and future extraction tax must also be considered.

Employer pension contributions
A company can make employer pension contributions for a director. Where the normal tax conditions are met, this can be a useful way of moving company funds into retirement savings without first paying a dividend.

Commercial identity and credibility
A company name, registration number and filing history can give customers and suppliers a clearer view of the organisation. Incorporation does not make a business safer or better by itself, but in some sectors it supports a more established commercial identity.

Separating business assets and risk
The company may own vehicles, equipment, stock, intellectual property and customer contracts. Keeping these within a separate legal entity can make ownership clearer, especially when several people are involved or the business carries material risk.

Disincorporation is a transfer of a business
There is no button that changes a limited company into a sole trader.
The company and the individual are different legal persons. The trade, assets and obligations must be transferred from one to the other. The company must then either remain dormant or be closed correctly.

The transfer may involve:
– Stock and work in progress
– Vehicles, tools and equipment
– Goodwill and the business name
– Customer and supplier contracts
– Debtors and creditors
– Bank borrowing and finance agreements
– Employees
– Leases, licences and permits
– VAT and PAYE registrations
– Insurance policies
-Websites, domain names, telephone numbers and intellectual property

Each item needs to be reviewed. Some can be transferred easily; others require valuation, consent, a new agreement or a tax calculation.

What happens if the company owns a van?
A van owned by the company does not automatically become yours when you start trading as a sole trader.

The van must be transferred at an appropriate value
The company will normally need to sell or transfer the van to you. Transactions between a company and its shareholder generally need to be considered using market value for tax purposes.
If the van is worth £12,000, transferring it for £1 does not usually make the other £11,999 disappear. The company and shareholder tax consequences must be considered, along with how the transaction is recorded through the director’s loan account or as remuneration or a distribution.

Capital allowances may need adjusting
The company may have claimed capital allowances on the van. Its disposal value must be brought into the capital allowance calculation. This could create a balancing charge or affect the company’s capital allowance pool.
The sole trader then needs to decide how the van is treated in their own accounts. The available deduction will depend on the vehicle, the purchase value, business use and whether actual costs or an approved mileage basis is used.

VAT may be due
If the company is VAT registered and recovered VAT when it bought the van, VAT may be chargeable on the transfer. If the entire business is transferred as a going concern and the detailed conditions are met, different VAT treatment may apply.
The VAT position should be checked before the transfer invoice is raised.

Finance and legal ownership must be checked
If the van is subject to hire purchase, lease or another finance agreement, the company may not be free to transfer it. The lender’s consent, a settlement or a new agreement may be required.
The registered keeper, legal owner, insurer and breakdown provider must all be considered. The sole trader will need appropriate cover for the new ownership and business use.

The tax treatment of private use changes
While the company owns the van, private use may create a benefit-in-kind issue depending on the circumstances. Once the individual owns it as a sole trader, there is no company benefit, but only the business proportion of relevant costs is deductible.
The transfer date and evidence of market value should be retained.

Other tax issues when the business leaves the company

Assets are generally considered at market value
Company assets can include stock, vehicles, equipment, property, goodwill and debts. A transfer to a shareholder may be treated as taking place at market value even if no cash changes hands.
The company may face Corporation Tax consequences on gains or trading profits. The shareholder may also have a personal tax consequence depending on how value is extracted.

Goodwill may have a value
A profitable business may have customer relationships, a trading name, reputation or other goodwill. The fact that the shareholder created the goodwill does not mean it can always be moved out of the company without consideration or tax analysis.

Company losses do not transfer to the sole trader
Unused company trading losses belong to the company. They do not become personal sole-trader losses simply because the same individual continues the activity.

VAT registration needs to be addressed
The company and the individual are separate taxable persons for VAT. The sole trader may need a new VAT registration or a transfer of the existing registration. The transfer-of-a-going-concern rules may apply if the relevant conditions are met.
Outstanding returns, VAT liabilities and records remain important even after trading has stopped.

Employees may transfer
If the company employs anyone, employment-law advice may be required. The Transfer of Undertakings (Protection of Employment) Regulations may apply, and payroll, pensions, holiday entitlement and employer obligations need to be dealt with.

Extracting the remaining money can create tax
After assets and liabilities have been dealt with, the company may still have cash or reserves.
Taking that value out may be taxed as salary, a dividend, repayment of a director’s loan or a capital distribution, depending on the facts and the closure method.

Under the normal striking-off route, distributions above £25,000 are generally treated as income distributions. A solvent members’ voluntary liquidation may provide capital treatment, but it has professional costs and the anti-phoenix rules must be considered if the shareholder continues the same or a similar trade.
Business Asset Disposal Relief is not automatic and its conditions and the rate applying at the relevant date must be checked.

Historic liabilities do not vanish
The company must complete its final accounts, Corporation Tax return, payroll filings and VAT returns and pay its debts. Records must be retained.
Dissolving a company without dealing with its assets can result in those assets passing to the Crown. A company can also be restored to the register in some circumstances.

Practical steps before making a decision
Before stopping the company trade, we would normally work through the following:
– Prepare up-to-date accounts and establish the real level of recurring profit
– Compare company and sole-trader tax using the owner’s full personal circumstances
– Identify every asset, liability, contract and registration held by the company
– Obtain values for vehicles, stock, equipment, property and goodwill where necessary
– Review VAT, capital allowances and Corporation Tax on each transfer
– Check finance agreements, leases, licences and customer contracts for consent requirements
– Review employees, payroll, pensions and possible TUPE obligations
– Decide how company cash and reserves will be extracted
– Compare strike-off, liquidation and dormancy, including professional costs
– Arrange the sole-trader registrations, bank account, insurance and bookkeeping system
– Choose a transfer date and document what moves on that date
Complete all final company filings and retain the required records

The tax calculation should come before the company stops trading, not after the assets have already been moved.

So, should you disincorporate?
At the profit level in our example, the sole trader retains more under the simplified 2026/27 calculations. The annual difference is approximately £1,279 without a pension and £894 where both routes place £5,000 into a pension.

That saving is relevant, but it is not large enough to make the decision automatic.

Remaining incorporated may still be appropriate where:
– The business carries meaningful legal or contractual risk
– Customers require a company
– There are employees, leases, finance or valuable assets
– Profits are retained rather than fully withdrawn
– The owner wants to bring in shareholders or sell shares later
– Employer pension contributions form an important part of the plan
– Moving assets and extracting reserves would create significant tax or professional costs

Moving to sole trade may be worth considering where:
– The business is genuinely small and low risk
– Most profits are withdrawn each year
– The company has few assets, contracts or liabilities
– The administrative cost and responsibility of a company are disproportionate
– Customers and insurers are comfortable contracting with the individual
– The one-off transfer and closure costs are modest
– The correct question is not simply, “Which structure pays less tax this year?” It is, “Which structure gives this business the right balance of tax, cost, protection and flexibility over the next few years?”

How we can help
We can prepare a personalised comparison using your actual profit, other income, pension plans and drawings. We can also review the less obvious areas, including:
– Employer’s National Insurance and Employment Allowance
– Corporation Tax and dividend tax
– Pension contribution options
– Vehicles, equipment, stock and goodwill
– Capital allowances and VAT
– Contracts, finance and employees
– Extraction of reserves
– Strike-off, liquidation or dormancy
-The practical transfer into being a sole trader

As a small accountancy practice, we understand that the simplest structure is often attractive. We also know that closing a company without reviewing its assets and obligations can create unnecessary tax and legal problems.

If you are wondering whether your limited company is still the right structure, please speak to us before making any transfers or submitting a strike-off application. We can help you understand the numbers and plan the change properly if moving to sole trade is the right decision.

Contact Coalesco Accountants for a clear, personalised review of your limited company and sole-trader options by visiting our website – https://coalesco.co.uk/, call us on 0115 238 3228 or email info@coalesco.co.uk.