Why this is not the usual sole trader versus limited company question
Search "sole trader vs limited company" and you will find hundreds of articles that all say roughly the same thing: companies are tax-efficient above a certain profit, sole traders are simpler, limited liability protects your house. None of that is wrong, but almost none of it is written for a subcontractor inside the Construction Industry Scheme (CIS), and for a CIS subcontractor the generic answer can be actively misleading.
The reason is that CIS changes the cash flow, the refund mechanics and even the route into gross payment status depending on which entity you trade through. Money is deducted from your payments at source before you ever see it, you usually get some of it back, and exactly how and when you get it back depends entirely on whether you are a sole trader or a company. If you do not understand the scheme itself first, our guide to what the Construction Industry Scheme is and how it works sets out the basics. This page assumes you know the scheme and focuses on the structure decision through a CIS lens.
We will work through three things that genuinely differ between the two structures for a CIS subcontractor, then put the 2026/27 tax numbers on a realistic profit level. The three differences, in order of how much they tend to matter in practice, are refund timing, the gross payment status turnover test, and the headline tax arithmetic.
The deductions both structures share: labour only, before expenses
Before the differences, the one thing that is identical for both. Under CIS a contractor deducts money from your payment and pays it to HMRC as an advance against your eventual tax and National Insurance. The rate depends on your status:
| Your CIS status | Deduction rate |
|---|---|
| Gross payment status (GPS) | 0% |
| Registered subcontractor | 20% |
| Unregistered subcontractor | 30% |
Two features of this matter for the structure decision and apply whether you are a sole trader or a company. First, the deduction is taken from the labour element only. The cost of the materials you buy for a job is excluded from the deduction base. On a £1,000 invoice made up of £600 labour and £400 materials, a registered subcontractor has 20% applied to the £600, so the deduction is £120, not £200. This is one of the most commonly misunderstood rules in CIS, and getting your invoices to split labour and materials cleanly protects you from over-deduction under either structure.
Second, the deduction is taken before any expenses or your personal allowance. CIS does not know about your van, your tools, your mileage or your tax-free allowance. It just takes 20% (or 30%) off the labour. Because your real tax bill is calculated on profit after expenses and allowances, most registered subcontractors have far too much taken across the year and are owed a refund. That over-deduction is the engine behind the entire refund question, and it is where the two structures part company.
Difference one: refund timing, and this is the big one
If you take one thing from this guide, take this. The most important practical difference between trading as a CIS sole trader and a CIS limited company is when you get your over-deducted money back.
Sole trader: you wait for Self Assessment after 5 April
A sole trader recovers over-deducted CIS through the annual Self Assessment return. The CIS already suffered is entered on the return as tax paid, set against the actual tax and Class 4 National Insurance due on your profit, and any excess is repaid. The catch is timing. You cannot file until the tax year has ended on 5 April, and in practice the money comes back weeks or months after that, once the return is filed and processed. For a subcontractor who has had 20% taken on labour all year, that can mean carrying a four-figure shortfall in working capital for the best part of a year before it returns.
Limited company: you offset in real time through the EPS
A limited company does not wait. Because CIS deductions suffered by a company are treated as advance payments of the company's own PAYE and CIS liabilities, the company offsets the CIS it has suffered against the PAYE and CIS it owes HMRC each month. It reports the CIS deducted from its income on its monthly Employer Payment Summary (EPS), and that figure reduces what it has to pay over. Where deductions suffered exceed the company's liabilities, the surplus carries forward through the tax year and any final excess is repaid after the year end.
The effect is a genuine cash-flow advantage. Instead of waiting up to roughly 18 months for a Self Assessment repayment cycle to complete, a company recovers value month by month. For a subcontractor suffering heavy deductions, this real-time offset is frequently the deciding reason to incorporate, more than any headline tax saving. The mechanics of the EPS offset, including the common pitfalls when CIS suffered exceeds PAYE due, are covered in our guide to how CIS limited companies reclaim deductions in real time.
| CIS sole trader | CIS limited company | |
|---|---|---|
| How CIS is recovered | Self Assessment return | Offset against PAYE/CIS via the EPS |
| When | After 5 April year end, once filed and processed | Monthly, in real time, through the tax year |
| Cash-flow effect | Carry the shortfall, repaid in arrears | Recover value month by month |
| Typical wait for cash | Several months to around 18 months end to end | Within the monthly cycle |
Whichever structure you are in, the refund itself is something to get right rather than leave on the table. We treat the CIS refund as the front door to an ongoing relationship rather than a one-off rebate, which means recovering what you are owed and then keeping you compliant so it does not happen by accident next year.
Difference two: gross payment status is measured by entity
Gross payment status (GPS) lets a subcontractor be paid in full with no CIS deduction at all (0%), settling tax through Self Assessment or Corporation Tax instead. It is the strongest cash-flow position a subcontractor can hold, and the route to it differs by structure because the turnover test is measured by entity type.
To hold GPS you must pass three tests, all of them: a business test (you carry out construction work in the UK through a bank account), a turnover test, and a compliance test (all tax obligations met on time for the past 12 months). The business and compliance tests apply the same way to everyone. The turnover test is where the entity matters:
| Entity type | Net annual CIS turnover required |
|---|---|
| Sole trader | £30,000 |
| Partnership | £30,000 per partner OR £100,000 total |
| Limited company | £30,000 per director OR £100,000 total |
| Closely controlled company (5 or fewer controllers) | £30,000 per controller |
"Net" turnover here excludes VAT and excludes the cost of materials, mirroring the labour-only deduction base, and is measured over the last 12 months of construction work. The structural point is that a company can qualify on a per-director basis. A two-director company needs £60,000 of net turnover to clear the per-director route, or £100,000 on the total route. A single sole trader needs £30,000. So for a small firm with two or three working directors, incorporating can open a per-director path to GPS that simply is not available to an individual. It is not a guaranteed shortcut, but it is a real difference worth modelling.
Two cautions. First, GPS attaches to the legal entity, so a new company does not inherit the status a sole trader held, it has to qualify in its own right on its own record. Second, from 6 April 2026 the rules on keeping GPS tightened considerably under Finance Act 2026 (enacted law: Royal Assent 18 March 2026, in force 6 April 2026 under SI 2026/289). HMRC can now revoke GPS immediately, without notice, where a contractor "knew or should have known" about fraudulent connections in its supply chain, with a five-year reapplication ban and a new 20% knowledge-based penalty under sections 62A and 62B that can be recovered from directors personally through the officer-liability rules. Qualifying is no longer the end of the story. We cover the full qualifying and maintenance picture in our gross payment status guide, and our gross payment status service handles the application and the ongoing due diligence that keeping it now requires.
Difference three: the 2026/27 tax arithmetic, done properly
Now the numbers, on a realistic profit level. Generic comparisons usually quote out-of-date dividend rates or forget employer National Insurance entirely. Here is the 2026/27 position done correctly, on a subcontractor with £55,000 of taxable profit (that is, turnover less allowable expenses, the same starting point for both structures).
As a sole trader
A sole trader pays income tax and Class 4 National Insurance on the profit. For 2026/27, with a personal allowance of £12,570 and the higher-rate threshold at £50,270:
- Income tax: 20% on the £37,700 between £12,570 and £50,270 is £7,540, plus 40% on the £4,730 above £50,270 is £1,892. Income tax total: £9,432.
- Class 4 National Insurance: 6% on the £37,700 band is £2,262, plus 2% on the £4,730 above the upper limit is £95. National Insurance total: £2,357.
- Combined tax and National Insurance: roughly £11,789, leaving about £43,211 in your pocket.
As a limited company
The company route is built in layers: a small salary, employer National Insurance on it, Corporation Tax on the remaining profit, then dividend tax when the director draws the profit out. Using a £12,570 salary (covered by the personal allowance) and drawing the rest as dividends:
- Employer National Insurance: 15% on the salary above the £5,000 threshold, that is 15% of £7,570, is about £1,136. Salary plus employer NIC is deductible for the company.
- Corporation Tax: on the £41,294 of profit left after the deductible salary and employer NIC, at the 19% small profits rate (profit is under £50,000), is about £7,846.
- Dividends available after Corporation Tax: about £33,448. After the £500 dividend allowance, the taxable dividends fall in the basic band and are taxed at the 2026/27 ordinary dividend rate of 10.75%, a dividend tax of about £3,542.
- Combined cost (employer NIC plus Corporation Tax plus dividend tax): roughly £12,524, leaving the director with about £42,477 after drawing everything out.
| 2026/27, £55,000 taxable profit | Sole trader | Limited company (all profit extracted) |
|---|---|---|
| Income tax | £9,432 | nil on salary (within allowance) |
| Class 4 National Insurance | £2,357 | not applicable |
| Employer National Insurance (15%) | not applicable | £1,136 |
| Corporation Tax (19%) | not applicable | £7,846 |
| Dividend tax (10.75%) | not applicable | £3,542 |
| Total tax and NIC | about £11,789 | about £12,524 |
| Net in your pocket | about £43,211 | about £42,477 |
The honest conclusion at this profit level is striking, and it is the opposite of what most generic articles imply: if you draw out every penny, the limited company is slightly more expensive, by roughly £735 here. Employer National Insurance at 15% and dividend tax at 10.75% (both higher than they used to be) more than swallow the corporation tax advantage when all the profit is extracted at a modest profit level. The dividend rates rose on 6 April 2026 to 10.75%, 35.75% and 39.35%, which has narrowed the company advantage across the board, so any comparison using the old 8.75% or 33.75% rates overstates the company case.
Where the company actually pulls ahead
None of this means the company is the wrong answer. It means the company wins for different reasons than the headline rate, and at higher profits. Two effects matter:
- Retained profit. The company only suffers dividend tax on what you draw out. If your profits are comfortably above what you need to live on, leaving the surplus in the company means it is taxed once at the Corporation Tax rate and the dividend layer is deferred until you draw it, possibly in a later year at a lower marginal rate. A sole trader is taxed on the full profit every year whether they need it or not.
- Higher profits. As profits climb into the higher-rate band, the sole trader pays 40% income tax on the excess immediately, while the company can manage the timing of extraction. The gap widens the further above the higher-rate threshold you go and the less of the profit you need in your own hands.
So the company case is really a case about cash-flow timing (the real-time EPS offset from difference one) and profit timing (retaining and deferring), not about a magically lower tax rate on extracted income. At a £55,000 fully-extracted profit those advantages are too small to outweigh the extra cost and admin. They become decisive higher up. The right answer is to model your own figures rather than follow a rule of thumb, which is exactly what our construction accounting services do before recommending a structure.
The other CIS-specific factors that tip the decision
Tax and refunds are the core of it, but three further CIS-flavoured points often decide a marginal case.
Making Tax Digital lands on sole traders, not companies
From April 2026, sole traders and partnerships with gross income over £50,000 must keep digital records and file quarterly updates under Making Tax Digital for Income Tax (MTD ITSA), with the threshold dropping to £30,000 from April 2027. The CIS trap that catches subcontractors out is that the threshold is tested on gross income before expenses, not the net amount you bank after CIS deductions. A subcontractor on £60,000 gross who receives £48,000 after 20% CIS is in scope on the £60,000 figure, even though their bank statements look like £48,000. Limited companies are outside MTD ITSA (they file Corporation Tax returns instead), so incorporating removes the quarterly-update burden, although it replaces it with company filing. We unpack the gross-income point in our guide to Making Tax Digital and CIS.
Personal exposure under the April 2026 GPS rules
The April 2026 anti-fraud regime can reach company directors personally. Under new FA 2004 sections 62A and 62B, enacted by Finance Act 2026, a 20% penalty applies to anyone who makes a payment or a return knowing a connected party deliberately failed to comply with CIS. The penalty falls on the payer or return-maker, usually the company, and there is no special director rate or 30% figure in these sections; what reaches the individual is the separate officer-liability rules, under which HMRC can recover a company's deliberate-behaviour penalty from the responsible directors personally. A sole trader is exposed to their own compliance, but the company route concentrates a specific, personal director-level risk that did not exist before. It is manageable with proper supply-chain due diligence, but it is a genuine factor in the decision for anyone who will pay their own subcontractors.
Being a contractor as well as a subcontractor
Many construction businesses are both: you suffer CIS on what you are paid, and you must deduct and report CIS on what you pay your own subcontractors through monthly CIS300 returns. A limited company that is both nets the CIS it suffers against the CIS and PAYE it owes through the single monthly EPS, which is administratively tidy. A sole trader in the same position reclaims the CIS suffered through Self Assessment while still filing the monthly returns as a contractor. The more you sit on both sides of CIS, the stronger the real-time company offset looks.
So which should you choose?
Strip away the generic advice and the CIS-specific decision comes down to a short set of questions, all of which point at your actual numbers rather than a rule of thumb.
- How heavily are you over-deducted, and is the cash-flow wait painful? Heavy CIS deductions and a tight cash position push towards the company route for the real-time EPS offset, even before tax is considered.
- What is your profit, and how much of it do you need to live on? Below the higher-rate threshold and drawing it all, a sole trader is usually as cheap or cheaper. Comfortably above it, or able to retain profit, and the company starts to win.
- Is gross payment status the goal? A multi-director firm may reach the turnover test more easily as a company through the per-director route.
- Are you over the MTD threshold? A sole trader over £50,000 gross now carries the quarterly-update obligation; a company does not.
- Will you pay your own subcontractors? If so, weigh the tidier EPS offset against the personal director liability under the April 2026 rules.
To put pounds on the comparison for your own turnover, use our CIS take-home calculator. It models both structures side by side with 2026/27 rates so you can see the actual gap before you decide.
There is no structure that is right for every CIS subcontractor, and the honest position is that for many sole traders at modest profits, staying a sole trader is the better answer once you account for cost, admin and the MTD burden landing either way. The case for a company is strongest where profits are higher, where you can leave money in the business, where the real-time refund offset solves a genuine cash-flow problem, or where incorporation opens a route to gross payment status. Because the right answer turns entirely on your figures, it is worth modelling properly rather than guessing. Our construction accounting services run the comparison on your actual profit, deductions and drawings before recommending a structure, and we handle the transition and the ongoing compliance whichever way it goes. If you want to talk it through, you can get in touch.