“Set up a limited company, it’ll save you tax.” It’s advice that gets passed around at the pub, at networking events and between friends. A few years ago, it was often true. Today, for many business owners, it isn’t.
In a recent webinar, the tax team at Bevan Buckland set out to bust that myth. Using simplified real-world examples, they compared self-employment, limited companies and property ownership to show what really matters: how much you take home and how much tax you pay overall. Here’s what they found.
How the tax landscape has shifted
HMRC and the Treasury have never been keen on owner-managed businesses using companies to cut their tax bills. Rather than banning the practice, they’ve gradually made it less rewarding. Corporation tax has risen from 19% to a top rate of 25%. The old dividend tax credit has gone. And from 6 April 2026, dividend tax rates rose again by two percentage points, taking the basic rate to 10.75% and the higher rate to 35.75%.
The employer’s National Insurance threshold has also dropped to £5,000, so a director drawing a modest salary now creates an NI cost that didn’t exist before. The result? Much of the old advantage has been quietly equalised away, but plenty of people are still making decisions based on how things used to be.
A quick guide to the three structures
Sole traders and partnerships. You run the business personally. Profits count as your income and are taxed each year, whether you withdraw the money or not.
Limited companies. The company is a separate legal entity. It pays corporation tax on its profits, and you pay personal tax when you take money out through salary or dividends. That brings flexibility, but also more admin and a different set of trade-offs.
Limited liability partnerships (LLPs). These are taxed much like an ordinary partnership, with each partner paying tax on their share. The key difference is legal: an LLP gives you limited liability protection.
What the numbers show
Take a business making £50,270 in profit, right at the top of the basic rate band. As a sole trader, you’d keep £40,468 after tax. Run the same profit through a company, paying a basic salary and the rest as dividends, and you’d be around £1,400 worse off. Even where the employment allowance applies (and there are conditions), you’re still roughly £590 behind.
At £100,000 of profit, the gap widens to around £4,000, or about £3,500 with the employment allowance. And that’s before you’ve paid for the extra admin a company brings: identity verification at Companies House, PSC filings, annual accounts, corporation tax returns and payroll.
Until recently, there was a profit level of around £60,000 where a company still came out slightly ahead. With the latest dividend increase, that’s gone. If you’re drawing all your profits out, there’s no longer a point at which a company beats being a sole trader or LLP member.
Can a bigger salary fix it?
Some directors have wondered whether paying themselves a larger salary, covered by the employment allowance, could pull company profits below £50,000 and into the 19% corporation tax rate. It’s a clever idea, but on £100,000 of profit, a £50,270 salary with dividends on top still leaves you with about £65,774, well short of the £69,312 a sole trader would keep.
What’s interesting is that, in these examples, there’s almost no difference between taking a £12,570 salary or a £50,270 one. And when the tax cost is similar, salary has real practical advantages:
- Tax is handled through PAYE, so you only ever see the net amount.
- There’s no big self assessment bill landing on 31 January.
- A higher figure on your P60 can help when applying for a mortgage.
- It reduces the risk of an overdrawn director’s loan account.
That last point matters. It’s common for directors to draw money that’s actually needed for corporation tax. If there aren’t enough reserves to declare a dividend, your accountant can’t simply fix it, and an overdrawn loan account can trigger a Section 455 charge. It’s a tax you can reclaim, but it’s hard to get back.
Keep an eye on your salary level for pension purposes too. If you pay yourself too little, you may not build up qualifying years towards your state pension.
Where a company can still help
Companies come into their own when you don’t need to draw all the profits out. In one example, a director with £100,000 of profit takes £50,270 in total. Taking it all as salary, rather than a salary and dividend mix, left them £6,557 worse off personally, yet £3,413 better off overall once the company’s retained profits were included. It’s a perverse result, but a useful one if you plan to reinvest or draw the money later.
A company can also help you manage other thresholds. By limiting what you draw, you might avoid the High Income Child Benefit Charge and reduce Plan 2 student loan repayments. For someone earning £100,000, that can make a meaningful difference.
What about landlords?
From April 2027, property income will be taxed at 22%, 42% and 47%, two percentage points higher than other income. Relief for mortgage interest will also rise to 22%.
Without a mortgage, and if you need the rental income to live on, holding property personally generally still wins. A basic rate landlord with £37,700 of rental profit would be £298 worse off using a company and drawing everything. A higher rate landlord would be £2,784 worse off.
It changes if you can leave profits in the company. That same higher rate landlord would be £11,438 better off overall by retaining profits for reinvestment. And for those with substantial mortgages, the Section 24 restriction on interest relief can hit so hard that a company becomes the better option, even when drawing income. In one example, it came out around £3,700 ahead. Moving existing properties into a company brings its own complications, though, so specialist advice is essential.
The real takeaway
If this all feels complicated, that’s the point. Incorporation isn’t a one-size-fits-all decision, and the right answer depends on how much you earn, how much you need to draw, your other income, your plans for the future and much more. What works for your friend at the pub might cost you thousands.
Before you set up a company, or if you’re wondering whether your current structure still works for you, speak to a qualified adviser. The tax team at Bevan Buckland helps business owners and property investors across the UK compare their options with figures based on their own circumstances.
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