What's Changed in 2026
If you've run a limited company for a few years, 2026 is a fair moment to ask whether it's still the right setup. A couple of changes have chipped away at the advantage that made incorporating an easy decision, and it's worth understanding them before you assume your structure still does what it did when you set it up.
The big one is dividend tax. From 6 April 2026, the basic and higher dividend rates each rose by two percentage points, to 10.75% and 35.75%. Since most directors extract profit as dividends, that directly increases the cost of taking money out of your company. On top of that, directors of close companies now face new Self Assessment disclosure rules, with a £60 penalty for getting them wrong, and the corporation tax marginal relief band continues to catch more growing companies at an effective 26.5% rate.
The honest framing: none of this makes a limited company a bad idea. But it does mean the gap between a limited company and a sole trader is narrower than it was a few years ago, so the structure that was clearly right at setup deserves a fresh look.
Where It Still Wins
For plenty of established businesses, the limited company is still the better structure, and the dividend rise doesn't change that. It tends to win clearly where:
- You retain profit in the company. Money you don't draw is taxed at 19% to 25% corporation tax, not 40% to 45% income tax. For anyone reinvesting or building up reserves, that's a substantial long-term advantage the dividend rise doesn't touch.
- You contribute to a pension through the company. Employer pension contributions are a deductible expense, a genuinely tax-efficient way to extract value that sidesteps dividend tax entirely.
- You can split income with a spouse who holds shares, spreading dividends across two sets of allowances and bands.
- Limited liability matters to you. The company separates your personal assets from business debts, which a sole trader doesn't.
- Credibility counts in your market. Some clients, lenders and contractors simply prefer dealing with a limited company.
The Break-Even Point
As a rough guide for 2026/27, the tax advantage of a limited company starts to outweigh its extra cost and admin somewhere around £50,000 of profit for an owner who draws most of what they earn. That break-even point is higher than it used to be, precisely because the dividend rise shaved off part of the saving that once appeared at lower profits.
Below roughly £40,000 to £50,000 of profit, where you're drawing everything personally, the pure tax difference is often too small to justify the additional accountancy and filing costs of a company. Above it, and especially well above it, the company tends to pull ahead, more so if you retain profit or use pension contributions. The key word is "roughly", though, because the real answer depends on how much you actually withdraw, your other income, and whether you can share dividends, none of which a rule of thumb captures.
The Admin Twist Nobody Mentions
Here's a change that cuts the other way, and most "should I incorporate" articles miss it. From April 2026, Making Tax Digital for Income Tax went live for sole traders and landlords with income over £50,000, requiring digital records and quarterly reporting to HMRC rather than one annual return.
That matters for this decision because one of the traditional arguments for staying a sole trader was simpler admin. For higher-earning sole traders, that gap has narrowed: they now face their own quarterly reporting burden. So if you were weighing "the company is more hassle", it's worth knowing the sole trader route just got more demanding too.
When It's Worth Rethinking
There are genuine situations where reconsidering the structure makes sense. It's worth a proper look if your profits have dropped well below the break-even level, you draw every penny personally each year with no scope to retain profit, you don't need limited liability, and the compliance has become a chore you resent. For a business winding down within a couple of years, the costs of incorporation may also no longer amortise well.
But, and this is important, unwinding a limited company isn't free or simple. Closing or converting one carries its own costs and tax consequences, and done carelessly it can cost more than it saves. So "should I stop?" is a question to model carefully, not act on impulsively after reading a headline about dividend tax.
The Honest Answer
For most established businesses with decent, stable profits, a limited company is still the right call in 2026, the advantage is just narrower and the admin a little heavier than it was. The businesses that should genuinely reconsider are the ones whose circumstances have shifted: lower profits than at setup, drawing everything personally, no need for liability protection.
The trouble is that the headline changes, dividend rises, new reporting, MTD, all make people anxious without telling them what to actually do, because the right answer is entirely specific to your numbers. A £30,000-profit sole trade and a £120,000-profit company that retains earnings are completely different decisions. The only way to know which side of the line you're on is to model your own position, and that's exactly the kind of thing worth a conversation rather than a guess.
Worth reading next: for the detail behind this decision, see our guides on how to pay yourself from a limited company and company pension contributions and corporation tax, or run your figures through the dividend and corporation tax calculator.
Not sure your structure still fits? Let's look at your numbers.
If you're wondering whether a limited company is still right for you in 2026, we'll model your actual position, profit, drawings, pension, the lot, and tell you straight whether your setup still makes sense or whether something needs to change. No jargon, no pressure. Fixed monthly fees from £145 for established businesses across Bedfordshire, Hertfordshire, Buckinghamshire and Northamptonshire, and remotely throughout the UK.
Book a Free ConsultationA straight second opinion on whether your structure still works for you.
Frequently Asked Questions
For most established businesses drawing a reasonable profit, yes, but the advantage is narrower than it used to be. The 2026/27 dividend rise pushed the break-even point higher, to roughly £50,000 of profit for owners who draw most of what they earn. The structure still wins clearly where you retain profit, contribute to a pension through the company, split income with a spouse, or value limited liability.
Dividend tax rose two points from 6 April 2026 (to 10.75% basic and 35.75% higher), making extraction more expensive. Directors of close companies also face new Self Assessment disclosure rules with a £60 penalty per slip. Meanwhile, Making Tax Digital now adds quarterly reporting for sole traders over £50,000, which narrows the admin gap between the structures.
Reconsider if your profits have fallen well below £40,000 to £50,000, you draw every penny personally each year, you don't need limited liability, and the admin has become a burden. Closing or converting a company has its own costs and tax consequences, so model it properly with an accountant rather than acting quickly.
Not on its own. The rise narrowed the advantage but rarely erases it for established businesses with decent profits, especially where you retain earnings or use company pension contributions. The right answer depends on your profit, drawings, other income and plans, so it's worth running your own numbers rather than reacting to the headline.
This article is a general guide for the 2026/27 tax year and not tax advice. The right business structure depends on your specific circumstances, and changing structure has its own costs and tax consequences. Always speak to a qualified accountant about your own position before making a decision.