Who Pays More Tax? Self Employed or Company Director?
So who pays more tax? A self-employed sole trader or a director in a limited company?
Who pays more tax? This is a question that plagues the accountancy business because the answer will depend on your attitude to your own company.
All accountants make more money from limited companies than self-employed individuals, and they will be keen to tell you that “you pay less tax as a company director taking your pay as dividends”. This is of course true, but only from the very narrow perspective of a company employee. If you are a director of a large company and you’re not affected by how much Corporation Tax your company has to pay, then fine.
But if you’re the director of a small company with only one or two directors, then all the company’s money is your money, and the Corporation Tax that the company has to pay comes out of your profits and will directly affect your overall earnings.
The key fact that many accountants choose to ignore and that company directors do not realise, is that although Dividend Tax is only 8.5%, you can only take dividends from company profits, on which you also have to pay Corporation Tax at a minimum of 19%. If your profits are above £50k, Corporation Tax rises to £22.75% at £100k.
The tables below clearly show that the self-employed pay less tax than company directors who are taking all their pay as a PAYE employee and also less than a director on a minimal wage up to the tax threshold (£12,570) and the balance of their pay in the form of dividends.
Table 1: Self Employed Profits & Income
Table 2: Company Director on Full Salary PAYE
Table 3: Company Director on Minimal Salary and Dividends
There may be plenty of good reasons why you should run your business as a limited company, rather than being self employed as a sole trader or in a partnership, but paying less tax is not one of them.
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Due to court rulings over recent years, large companies in specific industries were forced to treat self-employed sub-contractors as ’employees’ with sick-pay and holiday entitlement. So many large companies now insist that you have to be a ‘limited company’ to act as a sub-contractor. If this is the case for your business then you have no option, but to be a director in a limited company.
These court actions were brought by trade unions acting on behalf of self-employed individuals who had only one customer. The first action in 2017 was lost, but the trade unions won on appeal in 2021. In 2023 the Supreme Court overturned the 2021 appeal. However it is unlikely that large companies will go back to hiring the self-employed.
Note that the tables are correct from April 2025. Taxpayers in Scotland will pay more tax in all cases.