Thinking about how to structure your business for tax efficiency can feel like an afterthought when you are busy winning work and keeping customers happy. Yet the way you choose to trade – whether as a sole trader, in partnership or through a limited vehicle – decides who pays what tax, when the money is due and how much of your profit you can keep. A well-chosen structure can reduce personal tax, unlock allowances, spread income around the family and protect assets. A poorly chosen one can leave you paying up to 45% income tax, 2% Class 2 and up to 9% Class 4 National Insurance while missing out on investment reliefs that limited companies enjoy.
From April 2025, the tax stakes are higher than ever. Corporation tax on profits above £250,000 stays at 25%, but the small-profits rate for companies under £50,000 remains 19 % (HMRC, 2025). Meanwhile, the dividend allowance has fallen again to just £500 a year (HMRC, 2024). Add a 4 % drop in the number of UK sole proprietors between March 2023 and March 2024 (ONS, 2024) and it is clear many owners are rethinking the right vehicle. In this guide, we unpack the tax impact of each structure and offer practical pointers so you can structure your business for tax efficiency with confidence.
Why the way you trade matters
Running costs rise every year, but tax remains your single largest overhead. Your trading vehicle affects:
- Income tax exposure: Personal rates rise from 20% to 45%.
- National Insurance: Class 2 and 4 for individuals versus employers’ and employees’ Class 1 inside a company.
- Timing of payments: Self-assessment balancing payments versus quarterly corporation tax or PAYE.
- Access to reliefs: Capital allowances, R&D credits and Business Asset Disposal Relief.
- Long-term planning: Pension funding limits, succession routes and exit tax.
Choosing deliberately – and revisiting the choice as profits grow – keeps more cash in the business and in your pocket.
Sole trader: Simple start, fewer reliefs
Trading under your own name remains the quickest way to test a new idea. Key tax points:
- Income tax bands: 20%, 40% and 45% apply to the whole profit.
- National Insurance: Class 2 at £3.45 a week and Class 4 at 9% up to £50,270 then 2%.
- Allowable expenses: Home-office costs, mileage and plant are deductible, but you cannot pay yourself dividends or claim employer pension contributions.
When profits exceed about £50,000, the marginal cost of Class 4 NI plus higher-rate tax often pushes effective rates above the 25% corporation tax headline, making incorporation worth modelling.
Partnership: Flexibility and shared profits
A general partnership lets two or more individuals pool profits and losses. Main tax angles:
- Income splitting: Profits can be allocated in any ratio the partners agree – useful where one partner has spare basic-rate band.
- Self assessment: Each partner files individually; there is no separate entity tax.
- Joint liability: Each partner is personally responsible for all the debts, so tax efficiency must be weighed against risk.
Partnerships work well where spouses or family members are involved, but profits must be high enough to justify multiple personal allowances.
Limited company: Shielding risk and accessing lower rates
For many SMEs the limited company is the go-to option because it separates owners from the trade. Tax highlights:
- Corporation tax bands: 19% up to £50,000 and 25% over £250,000 with marginal relief in between (HMRC, 2025).
- Dividends: Once profits are taxed, they can be distributed. Each shareholder enjoys the £500 dividend allowance, and basic-rate dividends are taxed at 8.75%.
- Salaries and pensions: Directors can set a salary at the secondary NI threshold and top up with employer pension contributions that are corporation tax deductible.
- Retained profits: Leaving profit in the company attracts no further personal tax, supporting investment or future exit planning.
Set-up costs are modest and compliance is heavier, but the blend of salary plus dividend keeps total tax and NI lower than sole-trader rates once profits pass roughly £35,000.
Limited liability partnership: Hybrid option
An LLP combines partnership flexibility with corporate status, offering:
- Limited liability: Personal assets are protected, unlike in a general partnership.
- Individual taxation: Each member is taxed like a partner on their share of profit, but the LLP itself files accounts at Companies House.
- Mixed member rules: Anti-avoidance legislation prevents shifting profit to a corporate member purely to access lower corporation tax, yet genuine corporate-partner structures still work where the company adds commercial value.
Professional services firms often prefer LLPs because members can withdraw profit without dividend tax, while still benefiting from a limited-liability wrapper.
When to structure your business for tax efficiency
Trigger points to review your set-up include:
- Profit growth: Passing £35,000-£50,000 taxable profit means comparing sole-trader NI plus tax with the company route.
- New investors: Outside capital usually requires shares.
- Family involvement: Issuing alphabet shares to a spouse can turn the £500 dividend allowance into £1,000 across the household.
- Asset risk: If the trade signs large contracts or leases, limited liability becomes as important as tax.
- Exit horizon: Companies qualify for Business Asset Disposal Relief at 10% on gains up to £1 million, something an unincorporated business sale cannot match.
Running the numbers with us once a year keeps your structure fit for purpose.
Moving from sole trader to company: Timing and practicalities
Switching mid-year is possible, but most owners wait for the financial year-end to simplify record keeping. Steps include:
- Transfer of business: Goodwill, stock and equipment can move at tax-written-down value to avoid charges.
- Setting a director’s loan: Any balance due back to you can be drawn tax-free later.
- Registering for PAYE: Even if you pay yourself only the secondary threshold salary.
- Informing HMRC: Submit a cessation date on your final self assessment.
Long-term planning: Succession, exit and pensions
Structure affects not just this year’s bill but the way you pass the business on:
- Shares: Easy to gift in stages, use growth shares or set up an employee ownership trust.
- Partnerships: Admit a new partner gradually and reduce older partners’ shares to manage CGT.
- Pensions: Companies can make employer contributions up to the annual allowance (£60,000 in 2025/26) and obtain full CT relief, boosting owners’ retirement pots faster than personal contributions.
Forward planning turns tax savings into lasting wealth. Talk to our team for a custom roadmap.
Make the structure work for you
The numbers show there is no single best option: the 19 % small-profits rate may look attractive, but higher dividend tax and the shrinking allowance claw some of it back. Partnerships flex profit shares, yet leave owners exposed. Sole traders stay simple but quickly breach higher-rate bands. LLPs split the difference. By reviewing profit forecasts, family income needs and risk appetite, you can structure your business for tax efficiency and keep more of what you earn.
If your turnover is climbing or your goals have changed, let us run the calculations. We will compare each option, highlight the savings and handle all the registrations, leaving you free to focus on growth.
Get in touch with us and structure your business for tax efficiency before the next tax bill lands.