How should you structure your business?

One of the most common questions we get asked is 'How should I structure my business?'. In the UK there are four main ways you can structure your business — sole trader, partnership, limited liability partnership (LLP), or limited company. The right answer depends on your income level, risk appetite, and business objectives — and the tax landscape has shifted considerably over the past few years.

Sole Trader

Operating as a sole trader is the simplest way to run a business. You are self-employed and solely responsible for the business. Your profits are taxed as income and you must register for Self Assessment.

Pros: - Simple to set up and run - Minimal reporting requirements - Class 2 National Insurance was abolished from April 2024, reducing the NIC burden - Class 4 NIC reduced to 6% (on profits between £12,570 and £50,270) from April 2024

Cons: - Unlimited personal liability - Can be less tax efficient at higher income levels - May appear less credible to some clients

Sole trader tax rates (2026/27)

Income is taxed at 20% (basic rate), 40% (higher rate above £50,270), and 45% (additional rate above £125,140). The personal allowance remains at £12,570. Class 4 NIC is charged at 6% on profits between £12,570 and £50,270, and 2% above that.

Partnership

A partnership is where two or more individuals carry on a business together. Each partner shares the profits and is personally liable for the business debts. Partners are taxed individually on their share of profits via Self Assessment.

Limited Liability Partnership (LLP)

An LLP combines the flexibility of a partnership with limited liability for its members. Each member's liability is limited to the amount they invest in the business. LLPs are commonly used by professional services firms.

Limited Company

A limited company is a separate legal entity from its owners and directors, providing limited liability. Profits are subject to Corporation Tax, and owners typically extract income as a combination of salary and dividends.

Corporation Tax rates (2026/27)

• Small profits rate: 19% — applies to profits up to £50,000
• Main rate: 25% — applies to profits over £250,000
• Marginal relief applies to profits between £50,000 and £250,000, tapering the effective rate

Dividend taxation

Extracting profits as dividends remains a key advantage of operating through a company — but the benefit has been significantly eroded in recent years. The dividend allowance has been reduced progressively and now stands at just £500 per year (from April 2024, down from £2,000 in 2022/23). Dividend tax rates are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate).

Employer NIC — a key consideration from April 2025

From 6 April 2025, employer National Insurance increased from 13.8% to 15%, and the secondary threshold (the point at which employer NIC becomes due) was reduced from £9,100 to £5,000 per year. For owner-managed companies paying a salary, this increases the cost of extracting income via salary and strengthens the relative attractiveness of dividends for remuneration above the secondary threshold.

Key considerations for limited companies: - Corporation Tax rate vs. Income Tax rates at your income level - Dividend taxation — the dividend allowance is now only £500 - Employer NIC at 15% on salary above £5,000 per year - IR35 off-payroll working rules for contractors - Administrative burden and cost of compliance

Which is best for you?

The answer depends on your individual circumstances. The gap between operating as a sole trader and through a limited company has narrowed considerably — particularly for those with profits below the higher rate threshold. Get in touch with us if you'd like personalised advice on structuring your business for the 2026/27 tax year.