Do Sole Traders Pay Corporation Tax?

Corporation Tax is a tax paid by limited companies on their taxable profits. This includes profit from trading, investments and selling assets for more than they cost (capital gains). Companies calculate their own tax, submit a Company Tax Return to HMRC, and pay the amount due directly—usually within 9 months and 1 day of the company’s year-end.

If you’re considering switching from sole trader to limited company, the move comes with new responsibilities—but also new opportunities. As your business grows, incorporating can offer greater control over how you take income, increased credibility with clients, and the potential to reduce your overall tax bill through careful planning. Our expert limited company accountants work with business owners across a wide range of industries, guiding them through incorporation, setting up efficient structures, and managing their Corporation Tax obligations. We’ll help you understand what’s involved and make sure you get the benefits without the stress.

Corporation Tax does not apply to sole traders or traditional partnerships. It is only relevant to businesses that are incorporated as companies through Companies House.

If you’re running a limited company, see how corporation tax works.

Do Sole Traders Pay Corporation Tax?

No, sole traders do not pay Corporation Tax. Instead, if you are a sole trader, you pay:

• Income Tax on your business profits

• Class 2 and Class 4 National Insurance Contributions (NICs)

You report your earnings and expenses through a Self Assessment tax return, which is due by 31 January each year (online submission). The tax you owe is calculated based on your profit—this is your income minus your allowable business expenses.

How Is a Sole Trader Taxed?

Here’s a quick breakdown of how sole trader taxation works:

• You register for Self Assessment with HMRC

• Keep records of all income and allowable expenses

• Submit a Self Assessment tax return each year

• Pay Income Tax at 20%, 40% or 45% depending on your total income

• Pay Class 2 NICs (if your profits are above the small profits threshold)

• Pay Class 4 NICs (9% on profits between £12,570 and £50,270, and 2% above that)

There is no separation between you and your business—so all profit is treated as your personal income.

Sole Trader vs Limited Company: Tax Differences

While sole traders don’t pay Corporation Tax, limited companies do—and this can sometimes lead to tax savings, depending on your income level and how profits are distributed.

Key tax differences:

Sole Trader

• Tax type: Income Tax + NICs

• Reporting: Self Assessment

• Business structure: No legal separation

• Profit distribution: All profits belong to you

• Tax planning options: Limited

Limited Company

• Tax type: Corporation Tax + Dividend Tax

• Reporting: Company Accounts + CT600

• Business structure: Company is a separate legal entity

• Profit distribution: Profits belong to the company

• Tax planning options: More flexible (e.g. dividends, pensions)

For lower profits, the simplicity of being a sole trader often outweighs the benefits of incorporation. However, once profits grow—or if you want to reinvest in the business or manage tax more strategically—it may be worth switching to a limited company.

Should I Set Up a Limited Company Instead?

There’s no one-size-fits-all answer. Some people choose to remain as sole traders for the simplicity, while others prefer the limited liability and tax planning advantages of running a company.

Consider switching if:

• You’re earning over £30,000–£50,000 in profit

• You want to reinvest profit into the business

• You need limited liability protection

• You plan to grow, employ staff or secure funding

• You want more control over how you take income

Before making the switch, speak to an accountant who can model the differences in tax, admin and cost for your specific situation.

Real-World Example

Sarah runs a freelance design business and earns £40,000 per year. As a sole trader, she pays Income Tax and National Insurance on that income, and files a Self Assessment return.

If Sarah incorporated her business and took a salary and dividends instead, she could potentially reduce her overall tax bill—but she would also take on new administrative duties, including filing company accounts and Corporation Tax returns.

The right choice depends on her goals, appetite for paperwork, and how much profit she plans to retain or withdraw.

Final Thoughts

Sole traders do not pay Corporation Tax—that’s reserved for limited companies only. If you're self-employed, your taxes are handled through Self Assessment and paid as Income Tax and National Insurance on your profits.

While Corporation Tax may not apply to you now, understanding how it works is useful—especially if you're considering growing your business or switching to a limited company in the future. If you're unsure which structure is right for you, getting tailored advice from an accountant can help you make a confident decision.

If you’re staying as a sole trader for now, it’s still important to have the right support in place to manage your finances properly. Our small company accountant service is ideal for sole traders and micro-businesses that want reliable advice, help with Self Assessment, and guidance on when it might be worth making the move to limited. We’ll make sure your business remains compliant, your expenses are claimed correctly, and you’re paying the right amount of tax—no more, no less. And when the time comes to grow or restructure, we’ll be ready to support you every step of the way.

If you’d like to explore related tax content, check out our Corporation Tax Help hub.