Sarah Bradford crunches the numbers to see whether in 2026/27 incorporation is still more tax-efficient than operating as a sole trader.
In April 2000, the then government introduced a 10% starting rate of corporation tax on the first £10,000 of taxable profits. This was reduced to 0% from April 2002, leading to a raft of tax-geared incorporations. At that time, the dividend regime was more favourable, too, with no additional tax to pay on grossed-up dividend that fell within the basic rate band.
In this climate, it was more tax-efficient to operate as a limited company, paying a small salary and extracting further profits as dividends, than it was to operate as a sole trader. For sole traders wishing to incorporate, incorporation relief allowed them to transfer the assets, including goodwill, to the company, without
