Updated October 2026: tax rates and thresholds revised for the 2026/27 tax year.
Limited Liability Protection
A company and its owners are separate legal entities in the eyes of the law. In legal terms, this is often known as the ‘veil of incorporation.’
In practice, this means that a company’s owners and directors are not responsible for the company’s debts and cannot be sued by outsiders.
If your company goes bust your personal assets are safe. You do, however, stand to lose the money you’ve invested in the company and any assets you’ve transferred to the company.
Directors may be held personally liable for losses resulting from their own illegal acts or if they act negligently or beyond their powers.
Enhanced status
Trading as a company is often seen as more prestigious than trading in your own name. However, in practice, this makes no difference whether a business is incorporated or not.
Borrowing money
A corporate status may make it easier to obtain credit from suppliers. In reality, a newly formed company will probably struggle to obtain credit or borrow money without personal guarantees from the directors/ shareholders.
Sole traders rely on their own personal credit ratings if they wish to borrow money for their business. If the business owner’s personal credit rating deteriorates, this will affect the ability of the business to borrow.
Flexibility of ownership
Using a company makes it easier to involve new people in the ownership of the business and to separate ownership and management. If you want to involve your family members or key employees, you can issue them shares.
If you want to keep your stake in the business but do not want to be involved in its management, you can keep your shares but resign as a director.
Continuity
A company structure allows for a smooth exit from the company. Small numbers of shares can be passed on to family members over a number of years. You can also leave shares to different family members or key employees.
The death of a company member does not affect the existence of the company.
Tax
Don’t let the tax tail wag the commercial dog
Tax should not be the main reason for setting up a company, but good tax planning is still important.
Sole traders and partners pay income tax and National Insurance on all of their profits, whether they draw them or not. A company pays corporation tax on its profits, and you only pay personal tax on the salary and dividends you take out.
For 2026/27, companies pay corporation tax at 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief in between. A sole trader or partner with profits above £50,270 pays 40% income tax plus 2% Class 4 National Insurance on that slice of profit, a combined 42%. Profits left in a company to reinvest can therefore be taxed at a lower rate. Scottish taxpayers pay income tax at different rates and bands set by the Scottish Parliament.
Control
As a company owner, you control how much income you take out of the company and when. This helps you manage your personal tax bill and avoid the key thresholds where tax rises: £50,270 (the higher rate), £60,000 (where the High Income Child Benefit Charge starts), £100,000 (where your personal allowance starts to be withdrawn) and £125,140 (the additional rate). Sole traders and partners are taxed on their profits as they arise, so they have much less control.
The right mix of salary and dividends depends on your circumstances. Read our guide to extracting company profits tax-efficiently, see our company formation service, or contact us for advice.
