Has the tax advantage of a limited company shrunk?
Yes — significantly. A decade ago, incorporating offered a large, almost automatic tax saving. Two changes have eroded it: corporation tax rose from a flat 19% to a 19%–25% range (from 2023), and dividend tax rose by 2 percentage points in April 2026 (to 10.75% / 35.75% / 39.35%), while the dividend allowance shrank to just £500. On a simple “take all the profit out each year” basis, a sole trader is now often level with — or even ahead of — a limited company up to fairly substantial profits. The company's edge now comes mainly from its structural advantages, not from headline rates (GOV.UK — Tax on dividends; GOV.UK — Corporation Tax rates).
What changed — the headline-rate timeline
The four shifts that, together, closed the limited-company tax gap. Each is a permanent statutory change, not a one-off.
| Change | Before | Now (2026/27) | Impact |
|---|---|---|---|
| Corporation tax | Flat 19% | 19% (≤£50k) → 26.5% marginal → 25% (>£250k) | Companies above £50k profit pay more |
| Dividend tax (basic) | 7.5% (2017) → 8.75% (2022) | 10.75% (Apr 2026) | Extraction costs more |
| Dividend tax (higher) | 32.5% (2017) → 33.75% (2022) | 35.75% (Apr 2026) | Extraction costs more |
| Dividend allowance | £5,000 (2017) → £2,000 → £1,000 → £500 | £500 | Less tax-free buffer |
Verify current rates against GOV.UK — Tax on dividends and GOV.UK — Corporation Tax rates.
What changed, and what it means
The headline numbers everyone used to rely on have moved. Two statutory shifts — one in April 2023, one in April 2026 — have, between them, closed most of the tax gap that used to make incorporating an automatic win (GOV.UK — Tax on dividends; GOV.UK — Corporation Tax rates).
- Corporation tax went up. From a single 19% rate to a 19%–25% range depending on profit (post-2023). Companies with profits over £50,000 now pay more than they did, and inside the marginal-relief band each extra £1 of profit is taxed at roughly 26.5%.
- Dividend tax went up — twice over. The dividend allowance was cut repeatedly (from £5,000 a decade ago to £500 now), and rates rose two points in April 2026. Extracting profit as dividends costs more than it used to.
- The combined effect.The gap between “Income Tax + Class 4 NI as a sole trader” and “Corporation Tax + dividend tax as a company” has narrowed sharply. On full annual extraction, the simple comparison now often favours the sole trader at low-to-middling profits.
Where the company still wins — the extras that survive
The headline-rate case has weakened, but several structural advantages of the limited-company form are untouched by the April 2023 and April 2026 rate changes. These are now the real reasons to incorporate, not the rates.
Profit retention
Leave money in the company and it's taxed at 19% corporation tax (small-profits rate, not your marginal rate), to reinvest or extract in a lower-income year. A sole trader is taxed on all profit immediately — drawn or not.
Employer pension contributions
Paid by the company — no NI, no dividend tax, corporation-tax deductible. After the April 2026 dividend rise, this is now the most efficient extraction route of all for profit you don't need as immediate income.
Spousal dividends
Splitting income with a spouse who is a genuine shareholderuses both sets of personal allowances, dividend allowances and basic-rate bands. The April 2026 dividend rise raised the value of this where it is genuine — HMRC scrutinises arrangements that aren't.
Tax-efficient sale
Selling a company can be materially more tax-efficient than selling a sole trade, with Business Asset Disposal Relief on qualifying gains up to a lifetime limit.
Why most online comparisons are out of date
A lot of “sole trader vs limited” content was written before April 2023 (the corporation-tax rise) and before April 2026 (the dividend rise). The old rule of thumb — “incorporate as soon as you're profitable, you'll save tax” — assumed a flat 19% CT and 7.5%/32.5% dividend rates. Both halves of that calculation have changed. Check the date on any source you rely on, and verify against GOV.UK — Tax on dividends and GOV.UK — Corporation Tax rates.
The takeaway
The headline “companies pay less tax” is no longer reliably true on simple extraction — and a lot of online advice hasn't caught up. The real modern case for incorporating is about flexibility, retention, pensions, exit and liability, not a guaranteed rate saving. Knowing which of those actually applies to you is the difference between a smart incorporation and an expensive admin overhead.
If you want the real comparison run on your numbers — your profit, your extraction pattern, your pension headroom, your exit horizon — that is the conversation worth having before changing structure. RR's Limited Company Accountants service runs that comparison and tells you the answer in writing.
Related reading in this cluster
- Sole trader vs limited company — the 2026/27 pillar guide — the full structure decision: tax, liability, retention, exit.
- Sole trader vs limited company — the tax difference — the headline figures and the worked comparison.
- At what profit should you become a limited company? — the modern crossover and the costs that move it.
- Beyond tax: liability, credibility, pensions and selling — the structural extras that now drive most of the decision.
- Salary vs dividends — which is more tax-efficient in 2026/27? — the combined company + personal tax comparison after April 2026.
- How dividends are taxed in the UK (2026/27) — the rates, the £500 allowance, and what the April 2026 rise changed.
Frequently asked questions
Has the tax advantage of a limited company really shrunk?
Yes — significantly. A decade ago, incorporating offered an almost automatic tax saving on full-extraction profits. Two structural changes have eroded that edge: corporation tax moved from a flat 19% to a 19%–25% range from April 2023, and dividend tax rose two percentage points in April 2026 (basic 10.75%, higher 35.75%) while the dividend allowance shrank to just £500. On a simple take-it-all-out basis, a sole trader is now often level with — or ahead of — a limited company up to fairly substantial profits.
Why did UK dividend tax rise in April 2026?
The basic and higher dividend rates each rose by two percentage points from 6 April 2026 — basic from 8.75% to 10.75%, higher from 33.75% to 35.75% (gov.uk/tax-on-dividends). The additional rate of 39.35% is unchanged. The rise sits on top of a multi-year shrinkage of the tax-free dividend allowance, which fell from £5,000 a decade ago to £2,000, then £1,000, and now £500. Together, those two changes make extracting profit as dividends materially more expensive than it used to be.
What changed about corporation tax in 2023?
From 1 April 2023, the single 19% corporation tax rate was replaced by a tiered system (gov.uk/corporation-tax-rates). Profits up to £50,000 are still taxed at the small-profits rate of 19%. Profits above £250,000 pay the main rate of 25%. In between, marginal relief applies — every extra £1 of profit in that band is effectively taxed at around 26.5%. Companies with profits over £50,000 now pay more corporation tax than they did before 2023, and the comparison with a sole trader's Income Tax + Class 4 NI bill is no longer one-sided.
Do limited companies still pay less tax than sole traders?
Not reliably — and that is the contrarian point. On a simple full-extraction basis (take all the profit out each year as salary plus dividends), the combined corporation tax + dividend tax bill is now often comparable to, or slightly higher than, a sole trader's Income Tax + Class 4 NI bill at low-to-middling profits. The company's tax edge typically only re-appears at higher profits, or once you start using the structural extras (retention, employer pensions, spousal dividends, BADR on exit). The headline-rate saving is gone.
Is it still worth incorporating in 2026/27?
Often — but for different reasons. The modern case for a limited company is structural: limited liability, the ability to retain profit at 19% rather than your marginal income-tax rate, employer pension contributions that avoid NI and reduce corporation tax, splitting income with a spouse who is a genuine shareholder, and a more tax-efficient eventual sale via Business Asset Disposal Relief. If those factors apply to you, incorporating still makes sense. If your only reason is 'companies pay less tax', the maths probably no longer supports you.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief (BADR) is a Capital Gains Tax relief that reduces the rate of CGT on qualifying disposals of business assets — including shares in a personal trading company — up to a lifetime limit (gov.uk/business-asset-disposal-relief). It is one of the structural advantages that survives in the limited-company case: selling a company can be materially more tax-efficient than selling a sole trade. Eligibility conditions on shareholding, employment and trading status apply, and the rate has been rising — verify current rates and limits on GOV.UK before relying on it.
Why do most online comparisons still say 'incorporate to save tax'?
Because most of that content was written before April 2023 (when corporation tax rose) and before April 2026 (when dividend tax rose again), and it has not been updated. The old rule of thumb — 'incorporate as soon as you are profitable, you'll save tax' — was reasonable when corporation tax was a flat 19% and dividends were taxed at 7.5%/32.5%. Both halves of that calculation have changed. Always check the date on any comparison you read, and verify the rates against GOV.UK before acting.
Will the dividend tax rise again?
There is no announced further rise beyond the April 2026 change as of the date of this article. Tax policy can shift in any Budget, so always verify current rates against gov.uk/tax-on-dividends before making a structure or extraction decision. The longer-term direction of travel for dividend tax has been upward — the rates have risen in 2016, 2022 and 2026, and the dividend allowance has been cut repeatedly — so plans built on assumed future stability of these rates should carry a margin.
The full Business Structure series
Pillar
Sole trader vs limited company — the 2026/27 guide
The full structure decision: tax, liability, retention, exit.
Spoke 1
Sole trader vs limited — the tax difference
The headline figures and the worked comparison.
Spoke 2
At what profit should you become a limited company?
The modern crossover and the costs that move it.
You are here
Has the tax advantage of a limited company shrunk?
The contrarian answer: yes, significantly — and why most advice is stale.
Spoke 4
Beyond tax: liability, credibility, pensions and selling
The structural extras that now drive most of the decision.
Spoke 5
Switching from sole trader to limited company (the tax side)
Incorporation relief, timing, VAT, and what changes the day you incorporate.
Spoke 6
Which is right for you — and how RR advises
The decision framework: profit, risk, retention, pension, exit, admin.
The 'just incorporate' advice is outdated for 2026/27.
Corporation tax rose, and dividend tax rose another 2 points in April 2026. On simple extraction, the sole trader is now often level — or ahead — up to fairly high profits. Run the real numbers on your business before deciding.
RR
Run my structure review
A chartered practice runs the actual maths on your profit, risk, retention and exit plans — and tells you whether to incorporate, stay sole trader, and when to revisit.
See Limited Company serviceFree tool
Compare extraction routes
The Salary vs Dividend Optimiser models 2026/27 sole-trade tax against limited-company salary + dividend extraction on your profit. A fast first pass.
Open the optimiserVerity
Form your company (when you're ready)
If the decision is to incorporate, Verity (sister Rajoka brand) handles the Companies House registration and ID verification. RR then runs the ongoing tax.
See Verity formation
About the author
Mehmood Rajoka, Managing Partner, RR Accountants
Managing Partner at RR Accountants — a UK practice supervised by the Institute of Financial Accountants. Focus on limited-company advisory, structure decisions, and MTD for Income Tax. RR Accountants serves clients across four UK offices.
Connect on LinkedIn.
This guide is general information about UK tax rules. It is not personal tax advice. Tax outcomes depend on profit level, extraction pattern, pension headroom, spouse status and other personal circumstances. All figures verified against gov.uk as of . Re-check primary sources before acting.