Is It Time to Disincorporate? Understanding the Changing Tax Landscape. Part 1

Why the Tax Advantage Is Shrinking

The tax landscape for small businesses has shifted significantly. Since April 2023, companies with profits above £50,000 have faced a higher corporation tax burden. The marginal rate for profits between £50,000 and £250,000 is now 26.5%, and for those exceeding £250,000, the main rate is 25%. This is a stark increase from the flat 19% ratethat applied before, making incorporation less appealing for many small business owners.

Additionally, from April 2025, employer NICs are set to increase. The threshold for employer NICs will drop from £9,100 to £5,000 per year, while the rate will rise to 15%. This will make it more expensive to take a salary from a limited company. At the same time, the tax savings from dividends have eroded due to changes in dividend tax rates and the abolition of the old dividend tax credit system. While dividends still avoid NICs, they are not deductible for corporation tax, making the overall tax burden on company profits higher than it once was.

What This Means for Business Owners

For owner-managed businesses, the best way to withdraw profits now depends on a variety of factors, including salary versus dividend strategies, the availability of the employment allowance, and overall business profitability. Recent comparisons show that at different profit levels — whether £30,000, £80,000, or £150,000 — sole traders often end up with more post-tax income than directors of small companies. While company directors do have the flexibility to defer profit withdrawals, future tax rates are uncertain, making it difficult to predict if holding back distributions will actually lead to tax savings.

Should You Consider Disincorporation?

Given the reduced tax benefits ofrunning a limited company, some business owners may now find it more efficient to operate as sole traders. However, transitioning back to an unincorporated structure — known as disincorporation — requires careful planning. There are no specific tax reliefs available for this process, so business owners need to consider potential tax liabilities, including capital gains tax on business assets and the transfer of company liabilities.

Key Considerations Before Making a Change

If you’re thinking about disincorporating, it's important to assess your business’s financial position, projected profits, and tax obligations. Consider the costs of dissolving the company, such as legal and accounting fees, and whether you would lose any contractual benefits tied to a corporate structure. Businesses with significant retained earnings may also need to account for dividend tax implications when distributing accumulated profits before closing the company.

Final Thoughts

With rising corporation tax rates and increased employer NICs, many small business owners should review whether their company structure remains the best option. While incorporation still has benefits — such as limited liability protection and easier access to financing — the tax savings are not as clear-cut as they once were. Before making a decision, seek professional advice to ensure you fully understand the financial and tax implications of disincorporation. At Zeus Accountants, we can help assess your situation and guide you through the best approach for your business.

‍