Incorporation

The issue of whether to run your busi­ness as a com­pa­ny or a sole trad­er or part­ner­ship is an impor­tant one. In this fact­sheet, we sum­marise the poten­tial tax con­se­quences aris­ing from oper­at­ing as a com­pa­ny.

Tax cost/savings

The exam­ples below give an indi­ca­tion of the 2026/27 tax cost of incor­po­ra­tion for a sole trad­er that:

• has no oth­er sources of income
• takes a salary of £5,000 from the com­pa­ny (set at the lev­el of the sec­ondary employ­er thresh­old for Nation­al Insur­ance con­tri­bu­tions (NICs)) with the bal­ance after cor­po­ra­tion tax paid out as a div­i­dend.

Clear­ly, the extent of the saving/cost is depen­dent on the pre­cise cir­cum­stances of the indi­vid­u­al’s tax posi­tion and may be more or less than the above fig­ures. Points to bear in mind will be the dif­fer­ent treat­ments of div­i­dends and salaries, the cor­po­ra­tion tax rate applic­a­ble and whether the indi­vid­ual wish­es to extract all prof­its from the com­pa­ny.

For exam­ple, if the salary was increased in Sce­nario 2 to £12,570 (employ­er NICs payable but nil employ­ee NICs) and the div­i­dend was reduced to £37,700 such that the indi­vid­ual would only be pay­ing income tax at the basic rate), the tax sav­ing of incor­po­ra­tion is £6,436.

Summary of relevant tax and NIC rates 2026/27

Rate of corporation tax

The main rate of cor­po­ra­tion tax is 25% for com­pa­nies with prof­its over £250,000. A small prof­its rate of 19% applies for com­pa­nies with prof­its of £50,000 or less. Com­pa­nies with prof­its between these lim­its will pay tax at the main rate reduced by mar­gin­al relief, which pro­vides a grad­ual increase in the effec­tive cor­po­ra­tion tax rate.

Taxation of dividends

The cash div­i­dend received is the gross amount poten­tial­ly sub­ject to tax. The rates of tax on div­i­dend income are 10.75% for basic rate tax­pay­ers, 35.75% for high­er rate tax­pay­ers and 39.35% for addi­tion­al rate tax­pay­ers.

A Div­i­dend Allowance tax­es the first £500 of div­i­dends received in a tax year at 0%.

National Insurance

NICs for com­pa­ny direc­tors are cal­cu­lat­ed on an annu­alised basis and the rate of employ­ees’ NICs is 8% above £12,570 for 2026/27. In addi­tion, a 2% charge applies to all earn­ings over the NIC upper earn­ings lim­it (£50,270 for 2025/26). The rate of NICs for the self-employed is 6% on prof­its above £12,570, and 2% on prof­its above £50,270.

Employ­er NICs are cal­cu­lat­ed at 15% of earn­ings above £5,000 for 2025/26.

NICs can be reduced to nil by incor­po­rat­ing, tak­ing a small salary up to the thresh­old at which NICs are payable and then tak­ing addi­tion­al prof­its as div­i­dends.

Pension provision

As an employee/director of the com­pa­ny, it should be pos­si­ble for the com­pa­ny to make pen­sion con­tri­bu­tions (sub­ject to lim­its) to a reg­is­tered pen­sion fund irre­spec­tive of the salary lev­el, pro­vid­ed it is jus­ti­fi­able under the ‘whol­ly and exclu­sive­ly’ rule. Pen­sion con­tri­bu­tions are deemed to be a pri­vate expense for sole traders or part­ners.

Other tax issues

Capital gains

Incor­po­rat­ing your exist­ing busi­ness will involve trans­fer­ring at least some of your assets (most sig­nif­i­cant­ly good­will) from your sole trade or part­ner­ship into your new com­pa­ny. The trans­fer of good­will may cre­ate a sig­nif­i­cant cap­i­tal gain although there is a mech­a­nism for defer­ring the gain until any lat­er sale of the com­pa­ny if the busi­ness is trans­ferred in exchange for shares in the com­pa­ny. 

Relief for goodwill

Gen­er­al­ly where good­will is sold to the com­pa­ny for cash or debt on or after 3 Decem­ber 2014, indi­vid­u­als are pre­vent­ed from claim­ing Busi­ness Asset Dis­pos­al Relief (BADR) and cap­i­tal gains tax (CGT) aris­es on the gain.

Property taxes

Depend­ing on where any prop­er­ty is sit­u­at­ed there will be Stamp Duty Land Tax (SDLT), Land and Build­ings Trans­ac­tion Tax (LBTT) or Land Trans­ac­tion Tax (LTT) charges to con­sid­er when assets are trans­ferred to a com­pa­ny. Good­will and debtors do not give rise to a charge, but land and build­ings may do so.

Income tax

The pre­cise effects of ceas­ing busi­ness in an unin­cor­po­rat­ed form includ­ing tran­si­tion­al adjust­ments aris­ing from changes to basis peri­ods, need to be con­sid­ered.

Capital allowances

Once again the posi­tion needs to be care­ful­ly con­sid­ered.

Other advantages

There may be oth­er non-tax advan­tages of incor­po­ra­tion and these are sum­marised below.

Limited liability

A com­pa­ny nor­mal­ly pro­vides lim­it­ed lia­bil­i­ty. If a share­hold­er’s shares are ful­ly paid he can­not nor­mal­ly be required to invest any more in the com­pa­ny. How­ev­er, banks often require per­son­al guar­an­tees from the direc­tors for bor­row­ings. The advan­tage of lim­it­ed lia­bil­i­ty will gen­er­al­ly apply in respect of lia­bil­i­ties to oth­er cred­i­tors.

Legal continuity

A com­pa­ny will enjoy legal con­ti­nu­ity as it is a legal enti­ty in its own right, sep­a­rate from its own­ers (the share­hold­ers). It can own prop­er­ty, sue and be sued.

Transfer of ownership

Effec­tive own­er­ship of the busi­ness may be more read­i­ly trans­ferred, in com­par­i­son to a busi­ness which is not trad­ing as a lim­it­ed com­pa­ny.

Borrowing

Nor­mal­ly a bank is able to take extra secu­ri­ty by means of a ‘float­ing charge’ over the assets of the com­pa­ny and this will increase the extent to which monies may be bor­rowed against the assets of the busi­ness.

Credibility

The exis­tence of cor­po­rate sta­tus is some­times deemed to add to the cred­i­bil­i­ty or com­mer­cial respectabil­i­ty of the busi­ness.

Pension schemes

The com­pa­ny could estab­lish an approved pen­sion scheme which may pro­vide greater ben­e­fits than self-employed schemes.

Staff incentives

Employ­ees may, with ade­quate safe­guards, be offered an oppor­tu­ni­ty to acquire an inter­est in the busi­ness, reflect­ing their posi­tion in the com­pa­ny.

Disadvantages

No analy­sis of the posi­tion would be com­plete with­out high­light­ing poten­tial dis­ad­van­tages.

Administration

The annu­al com­pli­ance require­ments for a com­pa­ny in terms of admin­is­tra­tion and account­ing tend to result in costs being high­er for a com­pa­ny than for a sole trad­er or part­ner­ship. Annu­al accounts need to be pre­pared in a for­mat dic­tat­ed by the Com­pa­nies Act and, in cer­tain cir­cum­stances, the accounts need to be audit­ed by a reg­is­tered audi­tor.

Details of the direc­tors and share­hold­ers are filed on the pub­lic reg­is­ter held by the Reg­is­trar of Com­pa­nies.

Privacy

The annu­al accounts have to be made avail­able on pub­lic record — although these can be mod­i­fied to min­imise the infor­ma­tion dis­closed.

PAYE/benefits

If you do not have any employ­ees at present, you do not have to be con­cerned with Pay As You Earn (PAYE) and returns of ben­e­fits forms (P11Ds). As a com­pa­ny, you will need to com­plete PAYE records for salary pay­ments and sub­mit details of salary pay­ments on a time­ly basis under PAYE Real Time Infor­ma­tion (RTI). You will also need to keep records of expens­es reim­bursed to you by the com­pa­ny. Forms P11D may have to be com­plet­ed; note from April 2027 ben­e­fits will need to be pay­rolled.

Dividends

If you will require reg­u­lar pay­ments from your com­pa­ny, you will need to set up a sys­tem to cor­rect­ly pay div­i­dends.

Transactions with the business owner

A busi­ness own­er may intro­duce funds to and with­draw funds from an unin­cor­po­rat­ed busi­ness with­out tax impli­ca­tions. When a com­pa­ny is involved there may be tax impli­ca­tions on these trans­ac­tions.

Director’s responsibilities

A com­pa­ny direc­tor may be at risk of crim­i­nal or civ­il penal­ty pro­ceed­ings e.g. for the late fil­ing of accounts or for break­ing the insol­ven­cy rules.