Traditionally, the biggest tax benefit of running a limited company came from how you extracted income. You’d take a small salary and top it up with dividends, which were taxed at lower rates than income tax and didn’t attract National Insurance.
But that landscape has shifted dramatically in recent years. Operating as a limited company has now become less tax-efficient for many of you.
Let’s explore the reasons behind this outcome. Of course, the legislation and change in the tax system are the catalyst, but why?
1. The Shrinking Dividend Allowance
The government has been quietly chiselling away at the dividend allowance (tax-free dividends) for years:
• £5,000 in 2016
• £2,000 from 2019–2023
• £1,000 in 2024
• £500 in 2025
That’s a staggering over 90% reduction since 2016.
The allowance is important because dividend tax rates are 8.75% for the basic rate, 33.75% for the higher rate, and 39.35% for the additional rate, and these rates have not decreased to provide relief. In fact, the situation is worsening, as rates are increasing by 2%, except for the additional rate.
2. Corporation Tax Has Gone Up
For years, companies paid a flat 19% corporation tax. Easy to understand. Predictable. Convenient.
But since April 2023, corporation tax is no longer one-size-fits-all:
• 19% on profits up to £50,000
• 26.5% marginal rate between £50,001 and £250,000
• 25% above £250,000
If you’re a small business with earnings in that middle band, you now face a higher effective tax burden than before, especially once you add dividend tax on top. A lot of our SME clients are in this bracket.
In fact, if you pay corporation tax at 25% or 26.5% and then withdraw profits as dividends (common for higher rate taxpayers), your combined effective tax rate can exceed 50%.
3. Sole Traders Have Quietly Become More Tax Efficient
While limited companies have seen allowances shrink and tax rates climb, the self-employed have quietly benefited from reforms:
• Class 2 NICs abolished
• Class 4 NICs remain at 9% (profits £12,570–£50,270) and 2% above that
This improves the net take-home pay for sole traders, narrowing the gap between self-employment and limited company structures. Unlike company directors, sole traders only pay tax once on their total earnings, so they don’t face a second layer of tax when extracting profits. With these changes, being self-employed is now more advantageous than it was a few years ago.
4. Increased Penalties and Compliance Burdens for Companies
Running a limited company has always involved more admin because of the annual accounts, corporation tax returns, confirmation statements, and statutory records. But the costs of getting things wrong are rising. As a result, the fees you pay your accountant will be higher if you operate through a company instead of running your business personally.
Meanwhile, sole traders face far simpler compliance requirements. Albeit there is now a further reporting requirement from April 2026 called Making Tax Digital (MTD). This will bring additional administrative burden.
5. So… Is a Limited Company Now a Bad Idea?
Not necessarily! It really depends on your personal position.
A limited company still makes sense if:
• You don’t need to withdraw all the profits
If you’re reinvesting profits to grow the business, paying 19–25% corporation tax may still be better than paying 40%+ as a higher rate sole trader.
• You want liability protection
Your personal assets are protected if the company gets into financial trouble.
• You need credibility or want to attract investment
The UK’s investment schemes (such as EIS and VCT) will be expanded from 2026, doubling the investment limit for qualifying companies.
• Your business has long-term scaling ambitions
Growing businesses often benefit from the structure, even if early tax advantages aren’t as strong.
Final Thoughts
Being a limited company is no longer the default choice for tax efficiency. The decision now depends largely on your earnings, how much you withdraw, and your business goals.
When was the last time you reviewed your business goals? It’s important to revisit and track them regularly.
Partnering with an accountant like Myers Clark can help you stay focused on your ambitions.
The tax advantages of operating as a limited company are diminishing. Choosing to go limited is now a commercial decision rather than just a tax-related one.
With increases in corporation tax, reduced dividend allowances, and higher dividend tax rates, the once-clear benefits have diminished. In many cases, especially if your profits are modest or you withdraw most of them, being a sole trader may now leave you with more money in your pocket.
If you went limited years ago because “that’s what everyone does,” it might be time to revisit the decision. The UK tax system for small businesses has evolved, and the benefits of limited companies, once obvious and substantial, are now far more nuanced.
If you have any questions or want to revisit your initial decision to form a Company, speak to your normal accountant. If you are not yet working with us, here’s who we help