Subcontractors: should you stay a Sole Trader or become a Limited Company?
Updated: Aug 24
Key Takeaways
At typical subcontractor profit levels in 2026/27, the take-home difference between the two structures is now very small — the old "go limited to save tax" rule no longer holds.
A limited company's main advantage today is retaining and reinvesting profit at 19% corporation tax, deferring dividend tax until you draw the money.
Limited companies reclaim CIS deductions through PAYE, not Self Assessment — which can tie cash up if the company runs little payroll.
A limited company gives limited liability and is sometimes required by contractors; a sole trader is simpler and cheaper to run.
The right structure depends on your profit, how much you draw, your liability, and what your contractors need — not a headline tax figure.
Neither structure is universally better for a construction subcontractor. Since the dividend tax rise in April 2026, the take-home pay from operating as a sole trader versus a limited company is now very close at typical profit levels, so the decision comes down to factors like liability, cash flow, reinvestment, and what your contractors require — not on tax alone. Here's how the two compare, and how to choose.
How each structure is taxed
As a sole trader, you and the business are the same legal entity. You pay Income Tax and Class 4 National Insurance on all your profit — whether or not you draw it out — through Self Assessment. It's simple, and there's one return to file.
As a limited company, the company is a separate legal entity. It pays Corporation Tax on its profit, and you take money out as a small salary plus dividends, paying dividend tax on those personally. That's two layers of tax, but it gives you far more control over when and how you're taxed.
The tax compared: a worked example
Here's the comparison most subcontractors actually want to see.
Assumptions: £60,000 annual profit, 2026/27, a single director with no Employment Allowance, the company taking a £12,570 salary and drawing the rest as dividends, with all profit extracted.
Sole trader | Limited company | |
Income tax | £11,432 | £0 (salary within allowance) |
Class 4 / employee NI | £2,457 | £0 |
Corporation tax (19%) | — | £8,796 |
Employer NI | — | £1,136 |
Dividend tax (10.75%) | — | £3,977 |
Total tax + NI | ~£13,889 | ~£13,909 |
Take-home | ~£46,111 | ~£46,091 |
At £60,000 fully drawn, the sole trader comes out about £20 ahead. Before the dividend rates rose to 10.75% and 35.75% on 6 April 2026, the limited company would have won comfortably here. That advantage has now largely gone for subcontractors who draw everything they earn.
(Illustrative figures for 2026/27; your position depends on your circumstances.)
Where each structure wins
If you draw everything, at any profit level: the sole trader is now marginally cheaper — not the company. Money drawn as dividends carries 19% Corporation Tax and then dividend tax on top, an effective 27.7% at the basic rate and around 48% at the higher rate, which slightly exceeds the sole trader's 26% and 42%. A company doesn't save you tax on profit you take straight out.
Profit you leave in the business: this is where a limited company genuinely wins. Retained profit bears only 19% Corporation Tax — the dividend tax is deferred until you draw it, and avoided entirely on money you reinvest. A sole trader is taxed on all profit every year, drawn or not.
Other company planning levers: employer pension contributions (deductible against Corporation Tax), splitting shares with a spouse to use their allowances, and timing dividends across tax years can all tip the balance towards a company — but they're planning choices, not automatic.
The pattern is clear: on profit you draw straight out, the sole trader is now level-to-slightly-ahead; the company's advantage comes from retaining, reinvesting, and planning — not from the salary-and-dividend split itself.
The construction-specific factors that actually decide it
CIS deductions are reclaimed very differently
As a sole trader, you reclaim overpaid CIS through your Self Assessment, usually as a refund after the year-end. A limited company has to offset its CIS deductions against its PAYE and NIC liabilities each month through the EPS, and can only recover any excess from Corporation Tax or as a repayment after the year-end. If the company runs little or no payroll, those deductions can get stuck and tie up cash for months. For a subbie whose income is mostly CIS-deducted, this is a genuine cash-flow consideration — and one worth getting a construction-specialist accountant to manage.
Gross payment status
Both structures can apply for gross payment status to be paid without deductions. Holding CIS-free cash inside the company can suit reinvestment.
Limited liability
In construction — with defects, contractual claims, and larger projects — a limited company protects your personal assets, subject to any personal guarantees you sign and your duties as a director. The bigger and riskier the work, the more this matters.
What your contractors require
Some main contractors and agencies will only engage limited companies, so incorporating can win you work. The flip side is off-payroll working (IR35): if you work through your own company much like an employee for a medium or large contractor, those rules can apply, so it's worth checking before you assume a company is the answer.
Reinvestment, growth, and admin
If you're buying plant, vans, or building a team, retaining profit in a company at 19% beats drawing it all and paying personal rates. On the other hand, a company means more admin — Companies House accounts, a confirmation statement, a CT600, payroll, and a director's Self Assessment (although Sole Traders also now have more admin work filing quarterly updates for MTD).
So which should you choose?
Stay a sole trader if your profits are modest, you draw everything you earn, you want minimal admin, and your liability risk is low.
Consider a limited company if you retain and reinvest profit, want limited liability on bigger or riskier work, have contractors who prefer it, or you're scaling a team — and you're comfortable with the extra admin.
Don't let tax alone decide it. At most subcontractor profit levels the difference is now marginal, so the sensible step is to have both structures modelled on your actual numbers before switching — a construction-specialist accountant can do that quickly and factor in the CIS and cash-flow points above.
Double check with a construction-specialist accountant. Every business is different, and even more so in construction. You don't have to be a client to ask for guidance.
Frequently Asked Questions
Is it better to be a sole trader or a limited company as a subcontractor? Neither is universally better. In 2026/27 the take-home pay is very close at typical profit levels, so the choice usually comes down to non-tax factors: limited liability, whether your contractors require a company, how much profit you reinvest, and how much admin you're willing to take on. A sole trader is simpler; a limited company offers protection and flexibility.
Do I pay less tax as a limited company in construction? Not necessarily. Since dividend tax rates rose in April 2026, a subcontractor who draws all their profit pays roughly the same either way. A company only saves meaningful tax when profit is retained and reinvested rather than fully drawn, because retained profit is taxed only at 19% Corporation Tax.
How does a limited company reclaim CIS deductions? Through its payroll. A company offsets CIS deductions suffered against its monthly PAYE and NIC liabilities via the Employer Payment Summary (EPS), then recovers any excess against Corporation Tax or as a repayment after the year-end. If the company has little payroll, deductions can build up and tie up cash, so it's worth having a specialist handle the mechanics.
Can a limited company get gross payment status? Yes. A company can apply for gross payment status and be paid without CIS deductions, provided it passes HMRC's tests — broadly a turnover threshold of £30,000 per director (or £100,000 for the whole company) and a clean compliance record. It can be a strong cash-flow benefit, especially if you retain profit in the business.
When should a subcontractor switch to a limited company? Usually when you start retaining and reinvesting profit, want limited liability on larger contracts, or a contractor requires it — rather than at a fixed income figure. Because incorporation is hard to unwind and changes how you're taxed and how you reclaim CIS, it's worth speaking to a construction specialist accountant and modelling your specific numbers before making the move.
Not sure which structure is right for you?
The tax is close enough now that the decision really depends on your numbers and how you work. Talk to the SiteLedger team on 01706 595 370 and we'll model both structures on your actual figures and handle the switch if it stacks up. As construction-specialist accountants, we do this for subbies every week.
Written by the SiteLedger team — construction-specialist accountants. Last reviewed: July 2026. Figures and rates apply to the 2026/27 UK tax year. This is general guidance, not personal tax advice; the right structure depends on your circumstances and incorporation is hard to unwind, so speak to us before deciding.