Still Worth Incorporating?
Limited company, sole trader or LLP. How to decide what fits your agency now the tax rules have changed.
For years, the advice was almost automatic. Once your agency was earning decent money, you set up a limited company, paid yourself a small salary, took the rest as dividends, and kept more of what you earned. Simple.
That advice is no longer automatic. From April 2026, dividend tax rates rose by two percentage points. Basic rate dividends are now taxed at 10.75% and higher rate dividends at 35.75%. Add corporation tax of 19% to 25% on profits before a dividend is even paid, and the gap between running a limited company and staying self employed has narrowed considerably. At some profit levels, for some owners, it has closed altogether.
So if you are a freelance designer, videographer or consultant wondering whether to incorporate, or a company director wondering whether the structure still earns its keep, it is a fair question. Here is how to think it through.
The tax picture has changed
A sole trader pays income tax and National Insurance on profits as they arise. A limited company pays corporation tax on its profits, and then the owner pays dividend tax on whatever they draw out. Two layers of tax instead of one.
When dividend rates were low, those two layers still added up to less than the sole trader's single layer. That is what made incorporation the default. But dividend rates have been climbing for a decade, the tax free dividend allowance has been cut from £5,000 to just £500, and the April 2026 increase tipped the balance further.
The result: if you plan to draw every pound of profit out of the business each year, the limited company often no longer saves you tax. In some cases it costs you more, once you factor in the extra accountancy and filing costs that come with running a company.
Where a limited company still wins
That is not the whole story, though. The limited company still has real advantages. They are just more specific than they used to be.
You control the timing. A sole trader is taxed on all profit in the year it is earned, whether they need the money or not. A company director can leave profit in the business, paying only corporation tax, and draw it out later when their personal income is lower. If you have a strong year followed by a quieter one, or you are building towards stepping back, that flexibility is genuinely valuable.
You protect your personal allowance. Once personal income passes £100,000, the personal allowance starts to disappear and the effective tax rate spikes. A director can cap what they draw and leave the rest in the company. A sole trader cannot.
Pension contributions work harder. Employer pension contributions from a company are usually the most tax efficient way to move money out of the business, and they are far more flexible than personal contributions as a sole trader.
Limited liability and credibility. If your agency signs meaningful contracts, hires staff or carries any real commercial risk, the protection of a separate legal entity matters. Some larger clients also prefer, or insist on, contracting with a limited company.
You can bring others in. Shares make it possible to reward key people through schemes like EMI options, split income with a spouse who genuinely works in the business, or sell the company one day. None of that is available to a sole trader.
Where staying a sole trader makes sense
If you are a one person business, you spend most of what you earn each year, and your profits sit comfortably under six figures, the case for incorporating is weaker than it has ever been. You avoid the second layer of tax, your admin is lighter, your accountancy bill is smaller, and your accounts stay off the public record at Companies House.
There is no shame in that. The right structure is the one that fits how you actually run your business, not the one that sounds more established on an email signature.
The third option: an LLP
If there are two or more of you running the agency together, a limited liability partnership is worth a look. It sits between the two structures. You get the legal protection of a separate entity, so your personal assets are shielded if something goes wrong, but the tax works like a partnership. Each member pays income tax and National Insurance on their share of the profits, with no corporation tax layer and no dividend tax on top.
Now that dividend rates have risen, that single layer of tax makes the LLP more attractive than it has been for years, particularly for agencies where the partners draw most of the profit each year anyway. The trade offs are real, though. Profit retention is far less tax efficient than in a company, share schemes like EMI are off the table, and you still file accounts at Companies House. It suits established partnerships that want protection without company tax mechanics, less so a business building value for a future sale.
The real question
The decision no longer comes down to a simple tax comparison at a single profit level. It comes down to how you use your profit. Owners who draw everything out each year have lost most of the tax advantage of a company. Owners who retain profit, invest through the business, fund pensions or plan an eventual sale still gain from the structure, sometimes significantly.
That is a personal calculation, and it changes as your business changes. If you incorporated years ago on advice that predates the current rules, it is worth rerunning the numbers. And if you are about to incorporate because someone told you that is just what you do, pause and check first.
At Highwoods Group we help agency owners across the UK weigh up exactly this decision, in every direction. If you want a clear answer based on your own numbers rather than a rule of thumb, visit highwoodsgroup.co.uk and get in touch.
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