Is It Time to Disincorporate?
The tax advantages of running a business as a limited company have been significantly eroded in recent years, and for many smaller businesses, operating as a sole trader may now be more tax-efficient. With higher corporation tax rates, rising employer NICs, and reduced tax benefits on dividends, it’s time for business owners to reassess their company structure.
Why Limited Companies Are Becoming Less Tax-Efficient
Several tax changes have increased the tax burden on small companies, including:
Higher Corporation Tax for Profits Over £50,000
- Since 1 April 2023, the corporation tax rate has increased from 19% to a marginal rate of 26.5% for profits between £50,000 and £250,000.
- Above £250,000, the full 25% corporation tax rate applies.
- Associated companies (those under common control) reduce these thresholds, increasing tax exposure for many business owners.
Employers’ National Insurance Contributions (NICs) Increasing from April 2025
- Rate rising from 13.8% to 15%.
- Threshold dropping from £9,100 to £5,000 per year, meaning more employer NICs will be payable on lower salaries.
- Dividends, once a key tax advantage, are no longer as tax-efficient due to:
- Higher dividend tax rates (8.75%+).
- Reduction in employee NICs, which makes salary-taking more attractive.
How Does This Impact Business Owners?
The table below compares post-tax income for directors of a limited company (who take a mix of salary and dividends) versus sole traders:
| Profit Before Tax (£) | Post-Tax Income (Director) | Post-Tax Income (Sole Trader) |
|---|---|---|
| 30,000 | £24,657 | £25,468 |
| 80,000 | £56,804 | £57,711 |
| 150,000 | £87,178 | £92,040 |
Sole traders retain more income at every profit level.
The tax savings of using a limited company have been greatly reduced.
At lower profit levels, business owners often need to withdraw all available profits, making the limited company structure less beneficial.
Should You Disincorporate?
For many owner-managed businesses (OMBs), disincorporation (switching from a limited company to a sole trader) could be financially beneficial. However, there are no special tax reliefs for disincorporation, so careful planning is required.
Key Considerations Before Disincorporating
Does your business need limited liability protection?
Do you rely on external investment or contracts requiring a company structure?
Would your tax position improve by operating as a sole trader?
How would disincorporation impact assets, liabilities, and tax liabilities?
What Should You Do Next?
Every business is different. Before making any changes, it’s crucial to assess your financial situation, tax liabilities, and long-term goals.
At Merranti Accounting, we can help you: ✔️ Analyse whether disincorporation makes financial sense for your business.
Plan a tax-efficient transition from a limited company to a sole trader.
Ensure compliance with HMRC rules and avoid unexpected tax charges.
Thinking about switching back to sole trader status? Contact us today for expert advice!
