It’s one of the most searched questions among small business owners — and the honest answer in 2026 is more nuanced than it used to be. For years, incorporating as a limited company was widely regarded as the obvious move once your profits hit a certain level. The tax savings were clear, the maths was straightforward, and most accountants would steer you that way without much hesitation. That picture has changed this year, and it’s worth understanding why before making a decision that has real and lasting consequences for your business. If you’d like to talk through your own situation with our team, get in touch and we’ll give you an honest assessment.
What Changed in April 2026
The key shift came on 6 April 2026 when dividend tax rates increased across the board. The basic rate rose from 8.75% to 10.75%, and the higher rate climbed from 33.75% to 35.75%. Since the main tax advantage of operating through a limited company has always come from extracting profits as dividends rather than salary — dividends being taxed at lower rates than income — this increase directly narrows the gap. Combined with a dividend allowance that has already fallen to just £500, the tax saving from incorporation is now smaller than it has been for many years, particularly for business owners operating at lower profit levels.
Where the Numbers Now Stand
A limited company is no longer automatically more tax efficient in 2026/27. The break-even point where incorporating produces a meaningful saving now sits closer to the £50,000 profit mark for most owner-directors. Below that level, the simplicity of remaining a sole trader, combined with the lower administrative and accountancy costs that come with it, can actually leave more money in your pocket overall. Above £70,000 profit, a limited company structure typically wins by a more meaningful margin, particularly when employer pension contributions are factored in, which reduce corporation tax directly and sit outside the dividend tax calculation entirely. Harrisonsaccountancy
It’s Not Just About Tax
Tax efficiency is only one part of the decision. A limited company is a separate legal entity, which means your personal liability as a director is limited to what you’ve invested in the business — your personal assets aren’t automatically on the line if the company runs into debt or faces a legal claim. As a chartered accountant Essex business owners come to when they’re weighing up exactly this kind of structural decision, we find that liability protection is often the more persuasive argument for incorporation, particularly for businesses in sectors where contract disputes or professional indemnity claims are a realistic risk.
The MTD Consideration for Sole Traders
Sole traders with income above £50,000 are now required to use Making Tax Digital compatible software from April 2026, with those earning above £30,000 following from April 2027. This adds an administrative layer to the sole trader route that didn’t previously exist, and it’s worth factoring in if you’re on the cusp of those thresholds. The reporting requirements under MTD — quarterly updates to HMRC rather than a single annual return — change the practical experience of being self-employed in ways that some business owners will find straightforward and others will find genuinely burdensome.
What to Think About Before You Switch
Incorporating isn’t irreversible, but it does create complexity that’s worth understanding before you commit. A limited company has its own filing obligations at Companies House, annual accounts, a corporation tax return, and — if you have employees or pay yourself a salary — payroll compliance to manage on top. The cost of running a limited company properly is higher than the cost of a sole trader self-assessment, and that cost needs to be weighed honestly against the tax saving you’d actually achieve at your profit level. Our financial advisor Essex team regularly runs these comparisons for clients and finds the right answer varies much more than people expect.
Getting the Decision Right for Your Business
The structure that suits you depends on your profits, how you want to extract income, your appetite for administration, your sector’s risk profile, and your plans for growth. None of those factors is generic, which is why a conversation with an accountant who knows your business is worth far more than a general rule of thumb. You can find out more about how we work with sole traders and limited company directors across Essex by visiting our about us page, or if you’re ready to run through the numbers together, we’re happy to help you make a well-informed decision rather than one based on how the answer used to look.