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Learn how to read limited company accounts, understand FRS 105 and FRS 102 Section 1A, and identify the key figures every UK company director should monitor.

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Choosing whether to operate as a sole trader (self-employed) or run a limited company remains one of the biggest decisions for UK business owners, and the answer is no longer as clear‑cut as it once was. With dividend tax increases, corporation tax now tiered and the introduction of Making Tax Digital (MTD), the landscape in 2026 looks very different from a few years ago. This updated guide explains the key differences, the latest tax rules, and what you need to consider if you’re thinking about incorporating or moving back to sole trader status. The Core Differences: Self‑Employed vs Limited Company Self‑Employed / Sole Trader You and the business are the same legal entity Profits are taxed via Self Assessment Straightforward setup and minimal admin Full personal liability for business debts Limited Company A separate legal entity Directors run the company; shareholders own it Profits are taxed at Corporation Tax rates Owners typically extract profits via salary + dividends More complex accounting and compliance Limited liability protection How Tax Has Shifted: Why the Gap Has Narrowed Dividend Tax Rates Have Increased Dividend tax has been rising over several years, reducing the traditional tax advantage of operating as a limited company. The tax‑free dividend allowance is now just £500, a big drop from the original £5,000. From 6 April 2026, the personal tax rates for dividends are: Basic rate: 10.75% Higher rate: 35.75% Additional rate: 39.35% This means the well‑known strategy of paying a small salary and taking the rest as dividends still works, but the savings are smaller than in the past. Corporation Tax Is Now Tiered Since 2023, Corporation Tax rates have been based on profit levels: 19% for profits under £50,000 25% for profits over £250,000 Marginal rate in between via tapering Note that the thresholds above reduce if the company has associated companies. While corporation tax is still generally lower than higher‑rate income tax, the gap has tightened. National Insurance (NI) Savings Still Exist Sole traders pay class 4 NI on profits above the threshold. Class 2 NI no longer needs to be paid. Employees (including directors) and the company pay class 1 NI on salaries above the thresholds, although there can be a reduction in the company NI if the Employment Allowance is available. No NI is payable on dividends. Making Tax Digital (MTD): A Key Factor for Sole Traders MTD for Income Tax Self Assessment starts from April 2026. Requirements include: Digital record‑keeping Quarterly submissions End‑of‑period finalisation This introduces new admin and potential software costs for self‑employed individuals. The latest from HMRC is that companies will not be required to comply with MTD, although annual accounts and corporation tax returns still need to be filed electronically. Incorporation If you've been self-employed and would like to incorporate, you may trigger a capital gains event when transferring your business into a company, depending on your circumstances. Incorporation relief may be available which effectively defers the tax. Professional guidance ensures you structure incorporation tax‑efficiently. Disincorporation: Moving Back to Sole Trader With higher dividend taxes and the narrowing of tax benefits, some business owners are now considering moving back to trading as a sole trader. It's important that you get professional advice on this as you may need to pay tax at income tax rates when moving from a company to self-employed. So… Which Structure Is Better in 2026? There’s no universal answer, but recent tax changes mean the “best” structure depends more on your circumstances than ever. A Limited Company Might Suit You If: ✔ Your profits are above £50,000 ✔ You want to keep profits in the company ✔ You need limited liability protection ✔ You plan to grow, scale, or bring in shareholders ✔ Your industry expects a company structure Self‑Employment Might Suit You If: ✔ Your profits are below £50,000 ✔ You value simplicity Final Thoughts Recent tax changes have shifted the balance but haven’t eliminated the benefits of incorporation entirely. The “best” structure depends on: Your profit level Whether you reinvest or withdraw income Your risk position How much admin you’re comfortable with Your long‑term goals If you’re unsure, the best next step is a personalised review of your business finances and future plans. Get in touch if you'd like tailored advice on the right structure for your business in 2026.

For many small limited companies, especially those with one director-shareholder, the most tax‑efficient way to take income is usually a mix of salary and dividends. While the principles stay broadly the same each year, key thresholds do sometimes change, and those changes can affect everything from your personal tax bill to childcare entitlements. Below is an overview of what to consider for the 2026/27 tax year. 💡 This is general guidance only. Your ideal setup may differ depending on your wider income, benefits, rental properties, pensions, and more, so always take advice tailored to you. Director Salary Options for 2026/27 Director salaries normally fall into one of two efficient ranges: A) Salary up to the personal allowance (£12,570) This is often used when the only person on the payroll is a director, so the company does not qualify for the Employment Allowance. This level: Keeps you within the National Insurance credits system (protecting your State Pension record) Minimises tax and NI B) Higher salary when the Employment Allowance applies If your company has more than one director or another employee on payroll, you may be eligible for the Employment Allowance, which reduces employer’s NI by up to £10,500. In these cases, taking a higher salary can be more tax‑efficient because: Employer’s NI is covered by the Employment Allowance You get more corporation tax relief on the salary This option isn’t available for single-director companies with no other eligible staff. In some situations - particularly where there are two directors, Employment Allowance is available, and the business wants to extract higher levels of income - salaries of up to around £40,000 each can be more tax‑efficient. This depends heavily on your wider income, allowances and business profits, so it should always be checked with your accountant. Dividends for 2026/27 If you're looking to take any further income from your company after the salaries, you would take dividends, although they can only be paid when you have enough profit in the company. Dividends are taken from post tax profits which means that you don't get tax relief on them like you do for salaries. You should also make sure that dividends are declared in accordance with your shareholdings if there are more than one shareholders. The dividend tax rates in the basic rate band will increase to 10.75% (previously 8.75%) and 35.75% (previously 33.75%) from 6 April 2026. Other Considerations Personal allowance The tax-free personal allowance is £12,570, but you lose £1 of personal allowance for every £2 earned over £100,000. If your total income (salary + dividends + any other income) exceeds £100,000, your personal allowance tapers away. This creates an effective tax rate of 60% within the £100,000-£125,140 band, making careful planning essential. Child Benefit & Tax-Free Childcare Interactions You may need to pay back some or all of your Child Benefit if your adjusted net income exceeds £60,000. Dividends count towards this, which often catches directors by surprise. Tax-free childcare eligibility is based on both parents working, earning the minimum threshold (as salary, not dividends) and not earning over £100k (total income). So again, this is a key reason why personalised planning is essential. How Much Do you Need (or Want) Think about how much income you need (or want) your company to provide and speak to your accountant and the best way to optimise this whilst taking into account your personal circumstances and goals. Don't forgot to use other tax-efficient ways to extract profits from your company such as pension contributions, relevant life insurance, trivial benefits etc. Check out our previous blogs for more information on these. Final Reminder: Always Take Advice This article is general guidance only, tax rules are complicated, and the right salary/dividend balance varies person‑to‑person. If you're unsure what’s best for your situation, speak to your accountant, or if you’d like help from CJL Accountancy, we’d be happy to walk you through the best setup for the 2026/27 tax year. Contact us here .