What are the Advantages and Disadvantages of a Limited Liability Company?
- Adil Akhtar
- Jan 3, 2022
- 17 min read
Updated: Sep 8
The Advantages and Disadvantages of a Limited Liability Company in the UK: What You Need to Know in 2025/26
Starting with the straight answer
If you’re weighing up whether a limited liability company (LLC) structure in the UK suits your circumstances, here’s the quick takeaway:
● The biggest advantage is that your personal assets are protected. Your risk is limited to the money you invest in the company.
● The biggest disadvantage is the compliance burden—annual accounts, Companies House filings, Corporation Tax returns, and stricter record-keeping than running as a sole trader.
● Tax savings can be achieved by paying a mix of salary and dividends, but frozen allowances and rising Corporation Tax rates in 2025/26 mean the savings aren’t as dramatic as a few years ago.
But that short version leaves out the real-world implications—the pitfalls, the numbers, and the scenarios I’ve seen trip up UK taxpayers. So let’s dig deeper.
Why people consider a limited liability company in the first place
Picture this: you’re running a successful design consultancy in Manchester. You’ve been trading as a sole trader for a couple of years, but turnover has grown to £120,000. A friend mentions that you could save tax and protect yourself by switching to a limited company.
That’s a typical point where people come to me—often excited about the supposed tax benefits but not always aware of the other responsibilities.
The reality? A company is not just a tax vehicle. It’s a legal structure that changes how you interact with clients, banks, HMRC, and even your own pension planning.
What limited liability actually means
In practical terms, limited liability means that if your company goes under, creditors can’t chase your personal house, car, or savings (except in cases of fraud or personal guarantees).
Example from practice: A client in Birmingham ran a small events business. During Covid-19, they lost contracts and couldn’t meet supplier payments. Because the company was limited, their personal home wasn’t at risk—the loss was contained within the company. Had they been a sole trader, they’d have faced bankruptcy.
This protection is the core reason many small businesses incorporate, especially those exposed to high risks (construction, events, consultancy with big contracts).
The tax angle in 2025/26
Of course, tax planning remains a strong motivator. But here’s where the conversation has shifted in 2025/26 compared to a few years ago.
● Corporation Tax: From April 2023, Corporation Tax moved to a main rate of 25% for profits over £250,000, with a small profits rate of 19% for profits under £50,000. Between these, a marginal relief calculation applies. This remains in place for 2025/26.
● Dividend Tax: The tax-free dividend allowance has been cut repeatedly and now sits at £500 for 2025/26. That means directors taking dividends pay tax sooner.
● Income Tax bands (England, Wales, NI) for 2025/26:
Band | Taxable Income | Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 – £50,270 | 20% |
Higher Rate | £50,271 – £125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
(Source: GOV.UK – Income Tax rates and allowances)
● Scottish taxpayers face a different set of bands, with up to six rates, including the Starter Rate (19%) and a Top Rate (48%).
● The Personal Allowance of £12,570 remains frozen until at least April 2028. This “fiscal drag” means more people are paying higher tax despite modest pay rises.
So, while incorporation can still reduce overall tax, the gap has narrowed. Clients earning under around £40,000–£50,000 often find the compliance costs and admin outweigh the tax benefits.
Administrative responsibilities: the hidden downside
One common mistake I see is underestimating the compliance obligations. Running a limited company means:
● Filing annual accounts at Companies House.
● Submitting a Corporation Tax return (CT600) to HMRC.
● Maintaining statutory registers (directors, shareholders, etc.).
● Meeting PAYE requirements if you pay yourself or staff a salary.
● Filing confirmation statements yearly with Companies House.
Failure to keep up? Penalties can snowball. I once had a client in Bristol fined over £2,000 simply for missing filing deadlines—wiping out any tax advantage they thought they’d gained.
Client case study: The contractor who got caught out
Take James, an IT contractor in Leeds. He incorporated in 2022 to save tax and keep clients happy (many big firms prefer limited companies due to IR35).
In 2025, his company turnover was £85,000. He paid himself a modest salary (£12,570) and took dividends of £40,000. On paper, this was efficient.
But he overlooked:
● The reduced dividend allowance (£500).
● Higher-rate tax creeping in due to frozen thresholds.
● The admin of payroll submissions.
Result? His personal tax bill in January 2026 was far higher than he’d budgeted. He told me, “I thought limited companies were always better—no one explained how the allowances changed.”
This is a classic trap—assuming incorporation is always the tax-saving route. It’s not.
Public perception and credibility
There’s also the reputational advantage. Clients and suppliers often take a limited company more seriously than a sole trader. In some industries (IT, consultancy, construction), being a company is almost expected.
Banks are also keener to lend to companies with proper accounts. But the flip side is public disclosure—your accounts are visible at Companies House. Even small companies have to publish certain details, which some people dislike.
Quick checklist: Who benefits most from a limited company?
From experience, here’s who typically gains from incorporating:
● Businesses expecting profits over £50,000 a year.
● Those in higher-risk sectors wanting asset protection.
● Contractors or consultants where clients require incorporation.
● Entrepreneurs wanting to retain profits in the business for reinvestment (rather than taking them all out as personal income).
Who might not benefit?
● Traders with modest profits (say under £30,000).
● Those wanting the simplest admin (a sole trader return is far easier).
● People who need all profits for personal spending—since extracting cash can be less tax-efficient under the new rules.
Why fiscal drag matters more now
One of the most overlooked disadvantages in 2025 is fiscal drag. With the personal allowance frozen, more directors find themselves tipping into higher-rate bands.
For example, Sarah, a freelance designer in London, incorporated her business in 2020. Her company’s profits have stayed flat at £55,000. But because thresholds haven’t risen with inflation, she’s now paying more in higher-rate tax on dividends than she expected—despite her income being the same in real terms.
That’s why the decision to incorporate isn’t static—you need to review it annually.
10 Advantages and Disadvantages of a Limited Liability Company (LLC) in the UK
Advantages of a Limited Liability Company (UK) | Disadvantages of a Limited Liability Company (UK) |
1. Limited Liability Protection – Shareholders’ personal assets are protected; they only risk the money invested in the company. | 1. Administrative Burden – More paperwork and regulatory compliance compared to sole traders or partnerships. |
2. Professional Image – Having “Ltd” after your business name often improves credibility and trust with clients, suppliers, and investors. | 2. Higher Costs – Incorporation fees, annual filings, and accounting services make it more expensive than running as a sole trader. |
3. Tax Efficiency – Corporation tax (currently 25% for profits above £250,000, and 19% for profits under £50,000 in 2025) can be more favourable than personal income tax rates. | 3. Public Disclosure – Financial statements, director details, and other company information must be filed at Companies House and are publicly accessible. |
4. Separate Legal Entity – The company can own property, enter contracts, and be sued in its own name, giving legal independence. | 4. Complex Accounting – Detailed accounts, confirmation statements, and corporation tax returns must be prepared and filed annually. |
5. Easier to Raise Capital – Attracts investors and allows issuing of shares, making it easier to expand than as a sole trader. | 5. Profit Extraction Issues – Taking money out (via salary/dividends) can be tax-inefficient if not structured properly. |
6. Continuity – The company continues to exist even if shareholders or directors change, unlike sole trader businesses. | 6. Strict Director Responsibilities – Directors have legal duties under the Companies Act 2006, with potential penalties for breaches. |
7. Pension & Expenses Benefits – Directors can benefit from company pension contributions and legitimate expense claims. | 7. Double Taxation Risk – Profits are taxed at company level, and dividends are taxed again when distributed to shareholders. |
8. Growth Opportunities – Easier to sell or transfer shares, making succession planning and exit strategies more flexible. | 8. Less Privacy – Personal details (e.g., directors’ names, addresses) appear on the public register. |
9. Credibility with Banks & Suppliers – More likely to secure loans, credit terms, and contracts compared to sole traders. | 9. Set-Up Time – Incorporating can take a few days and requires more initial formalities than starting as a sole trader. |
10. Attracts Skilled Staff – The structured nature of a company and ability to offer shares/options can help recruit and retain talent. | 10. Potential IR35 Issues – Contractors working through limited companies may face tax complications under UK’s IR35 legislation. |
Digging Deeper: Tax Implications, Regional Variations, and Common Pitfalls of Limited Companies in the UK
When the numbers don’t tell the full story
So, you’ve read the headline benefits—tax planning, limited liability, and credibility. But here’s the rub: the real-world outcomes are rarely as clean as the “pros and cons” lists you see online.
Over the years, I’ve seen plenty of business owners blindsided by hidden rules. From Scottish income tax quirks to unreported side hustles and the dreaded High Income Child Benefit Charge (HICBC), the devil is in the detail. Let’s unpick these, one step at a time.
Income tax variations across the UK
One of the most confusing issues I see for clients is the difference in income tax between England, Wales, Northern Ireland, and Scotland.
● In England, Wales, and Northern Ireland, the tax bands for 2025/26 are:
○ Personal Allowance: £12,570 (frozen until 2028)
○ Basic rate: 20% on £12,571–£50,270
○ Higher rate: 40% on £50,271–£125,140
○ Additional rate: 45% above £125,140
● Check the official rates.
● In Scotland, it’s a different landscape entirely, with six income tax bands for 2025/26:
○ Starter Rate: 19% (£12,571–£14,876)
○ Basic Rate: 20% (£14,877–£26,561)
○ Intermediate Rate: 21% (£26,562–£43,662)
○ Higher Rate: 42% (£43,663–£75,000)
○ Advanced Rate: 45% (£75,001–£125,140)
○ Top Rate: 48% (over £125,140)
● See Scottish rates here.
Now, here’s where it catches people out. A client of mine, Emily from Glasgow, set up a limited company in 2023. She paid herself a small salary and dividends, assuming the “English rules” applied. In fact, her salary portion was taxed under the Scottish system, while dividends still used the UK-wide dividend rates. She ended up with a tax bill she hadn’t budgeted for, simply because she hadn’t factored in Scotland’s unique bands.
This is why I always advise directors to double-check which regime applies in their tax code. You can view this in your HMRC personal tax account.
Dividend taxation in 2025/26
The once-generous dividend allowance has now been whittled down to a mere £500 in 2025/26. Beyond this, dividend income is taxed at:
● 8.75% (basic rate)
● 33.75% (higher rate)
● 39.35% (additional rate)
What does this mean in practice?
Take Adam, an IT consultant in London. He pays himself £12,570 in salary and £40,000 in dividends. In 2021/22, when the allowance was £2,000, much of this income escaped tax. In 2025/26, with only £500 tax-free, nearly all of it is taxed—reducing his effective savings from incorporation.
The point is simple: incorporation no longer guarantees big tax savings, especially for those under higher-rate bands.
National Insurance: where directors trip up
Another common trap is National Insurance Contributions (NICs).
● For employees (and directors who take a salary), the Class 1 NIC thresholds for 2025/26 remain aligned with the income tax personal allowance at £12,570.
● Primary Class 1 NIC (employee’s share) is 10% between £12,570 and £50,270, then 2% above this.
● Employers pay 13.8% NIC above £9,100.
See the current thresholds: National Insurance rates.
Because of this, many directors opt to pay themselves a salary just below the NIC threshold to keep contributions minimal, topping up with dividends. But I’ve seen too many forget that low salaries mean low qualifying years for State Pension. Unless you’re careful, this can reduce your entitlement later.
A simple fix? Make sure you’re still credited with enough NIC years, either by paying a small salary above the Lower Earnings Limit or checking via your National Insurance record.
High Income Child Benefit Charge (HICBC)
This one still catches out new directors. If your adjusted net income exceeds £50,000, and you or your partner claim child benefit, HMRC claws it back through the HICBC.
Case in point: A client in Cardiff paid himself £55,000 in dividends and a salary. His wife claimed child benefit for two kids. He was shocked when HMRC issued a £1,500 bill under the HICBC. It wasn’t that he’d done anything “wrong”—it’s just how the system works.
This is why I always warn clients: incorporation won’t shield you from personal income thresholds. It’s still your total income that matters.
Side hustles and multiple income streams
In today’s world, it’s common for directors to have more than one income source: a salary/dividends from their company, rental property income, and maybe even side freelance work.
All of this has to be reported via Self Assessment. Missing a source is one of the most common errors I see—particularly with rental or foreign income.
A London client once told me, “I thought my dividends were taxed in the company.” They’re not. Corporation Tax is paid on company profits, but personal dividend tax is still due via your return.
If you’re unsure, the simplest safeguard is to log in to your personal tax account and cross-check HMRC’s records.
Emergency tax codes: the nasty surprise
Let’s not forget tax codes. When you first draw a salary from your company, HMRC may apply an emergency tax code until payroll submissions stabilise. This often means too much tax deducted up front.
I’ve seen directors panic at their first payslip because it looked like HMRC was “taking half my money”. The truth? It usually sorts itself after a few months, or you can correct it via your PAYE tax code check.
But here’s the key point: you won’t get that refund automatically unless you act. You can claim it back through your personal tax account.
Checklist: Key pitfalls directors must watch for in 2025/26
Here’s a quick, accountant’s-eye checklist for company directors this year:
Review dividend allowance: It’s only £500 this year—budget accordingly.
Account for NICs: Don’t forget employer’s NIC if you’re paying staff (or yourself a higher salary).
Look at Scottish/Welsh differences: Your tax band may differ from the rest of the UK.
Consider Child Benefit: If your income crosses £50,000, factor in the HICBC.
Report all income sources: Rental, freelance, savings interest—declare it all in Self Assessment.
Avoid late filings: Companies House and HMRC fines rack up quickly.
Beyond the Basics: Business Planning, Long-Term Implications, and Strategic Considerations of Running a Limited Liability Company
Thinking longer term with your company
So far, we’ve explored the day-to-day tax and compliance landscape. But a limited liability company is more than just an annual headache with HMRC—it’s a vehicle for long-term planning. Used wisely, it can help with retirement, growth, and even passing wealth to the next generation. Used poorly, it can become a costly millstone.
Reinvesting profits: when leaving money in the company makes sense
One overlooked advantage is that profits left inside the company are taxed at Corporation Tax rates (19%–25% depending on thresholds), rather than your personal income tax rates (20%–45%).
For example:
● A sole trader earning £90,000 pays higher rate income tax (40%) on much of that income.
● A limited company owner can choose to draw only what they need, leaving the rest taxed at Corporation Tax rates inside the company.
This makes incorporation particularly valuable for businesses planning to:
● Buy assets (e.g., vans, machinery).
● Expand staff or premises.
● Build up a cash buffer.
But here’s the catch: keeping money in the company means it’s not yours personally until extracted. I once advised a director in Newcastle who left six-figure profits in the business for years. When he finally wanted to draw them as dividends, the rates had changed and his personal tax bill was eye-watering. Planning ahead is critical.
Pensions: one of the smartest tax moves
Company directors often miss this: your company can contribute directly to your pension, treating it as an allowable business expense.
● Employer pension contributions reduce taxable company profits (lowering Corporation Tax).
● They’re not restricted by your personal earnings (unlike personal pension contributions), though the annual allowance of £60,000 (2025/26) still applies.
See HMRC guidance: Tax on your private pension contributions.
A director I advised in Bath paid £20,000 into their pension via their company. It reduced the company’s Corporation Tax bill and boosted their retirement savings—double win. Compare that to drawing £20,000 in dividends, which would have attracted dividend tax.
Extracting profits: salary vs dividends vs alternatives
Directors usually juggle salary and dividends. But other extraction routes exist:
● Directors’ loans: You can borrow money from the company temporarily, but beware of the rules. If not repaid within nine months of year-end, a tax charge applies under s455 Corporation Tax rules.
● Benefits in kind: Cars, health insurance, etc., can be provided, but they often come with extra tax reporting under P11D rules.
● Renting property to the company: If you own premises personally, the company can pay you rent, creating a deductible expense. But you’ll need to report this as personal rental income on Self Assessment.
These options can be useful, but I’ve seen too many directors dive in without understanding the tax knock-ons. A client in Reading took out a large director’s loan to buy a car personally, thinking it was “tax-free”. HMRC charged the company a s455 tax bill plus interest—an expensive misunderstanding.
Planning for exit or succession
If you think ahead to selling or passing on your business, the structure really matters.
● Business Asset Disposal Relief (BADR) may allow you to pay just 10% Capital Gains Tax on qualifying company shares when selling, up to a lifetime limit of £1m. See: Business Asset Disposal Relief.
● Shares in trading companies may also qualify for Business Relief, reducing Inheritance Tax exposure. Business Relief guidance.
One client of mine in Bristol sold their consultancy in 2024 and benefitted from BADR, saving over £60,000 in tax. Had they stayed a sole trader, they wouldn’t have qualified.
But remember, not all companies qualify—investment companies, property rental businesses, and those with mixed activities often fall outside the relief rules.
The cost of getting it wrong
We can’t gloss over the disadvantages. Beyond admin, there are traps:
● Double taxation: The company pays Corporation Tax, then you pay personal tax on withdrawals.
● Loss of allowances: Earn over £100,000 and your personal allowance tapers away—an unpleasant surprise if you extract too much. Income Tax if you get over £100,000.
● Public disclosure: Your accounts and some personal details are available on the Companies House register.
● Professional costs: Accountancy fees are higher for companies than sole traders.
One memorable case: a sole trader in Liverpool incorporated in 2021 expecting big savings. By 2025, his profits were steady at £28,000, yet he faced higher fees, more admin, and virtually no tax advantage. He eventually closed the company and returned to sole trader status—proving incorporation isn’t always the right long-term fit.
Rare but painful mistakes I’ve seen
Over nearly two decades, I’ve come across scenarios you rarely see covered online:
● Directors forgetting PAYE filings: Even if you pay yourself a token salary, you must submit Real Time Information (RTI) to HMRC. Miss it and the fines build quickly. PAYE for employers.
● Mixing personal and company money: Using the company account like a personal piggy bank is a recipe for compliance issues. HMRC expects clear separation.
● Overdrawn directors’ loan accounts: These attract tax charges and can be viewed as disguised remuneration.
● Not registering for VAT in time: Once your turnover hits £90,000 (2025/26 threshold), you must register. Check VAT thresholds.
The balanced view in 2025/26
To wrap this up: incorporation is neither a golden ticket nor a guaranteed burden. It’s a tool. The question is whether it matches your situation, profit level, and long-term goals.
● For high earners planning to reinvest profits or save for retirement, a company is often worth it.
● For those under £30,000–£40,000 profit or needing cash personally each year, the admin may outweigh benefits.
● For family businesses, contractors, and those eyeing a future sale, the structure brings tangible strategic advantages.
Summary of Key Points
Limited liability protects personal assets, but doesn’t cover fraud or personal guarantees.
Corporation Tax is tiered (19%–25%), with marginal relief between £50k–£250k.
Dividend allowance is just £500 (2025/26), reducing the attractiveness of dividend strategies.
Scottish taxpayers face different income tax bands—salary taxed under Scottish rules, dividends UK-wide.
National Insurance must be considered—low salaries risk fewer qualifying years for State Pension.
High Income Child Benefit Charge applies above £50,000 adjusted net income.
Self Assessment is essential for directors with dividends, rental income, or side hustles.
Long-term planning is where companies shine—reinvesting profits, making pension contributions, and exit strategies.
Traps include double taxation, admin penalties, and director loan account charges—often more costly than people expect.
The best decision depends on profit level and goals—incorporation suits higher earners and growth plans, but not always modest traders.
FAQs
Q1: Can someone change their tax code if it shows emergency PAYE deductions?
A1: Well, it’s worth noting that emergency tax codes often correct themselves within a pay period or two—but in my experience with clients, the key is not to ignore that first dizzying payslip. If it stays wrong, a quick visit to your personal tax account or calling HMRC can resolve it faster than you’d expect.
Q2: Can a company director adjust their salary mid-year to optimise National Insurance contributions?
A2: In my practice, I’ve seen directors change tack halfway through the year to balance NIC savings versus state pension credits. It’s perfectly valid, but you must resubmit a real-time payroll submission—otherwise, HMRC will glitch your NIC records.
Q3: Can someone avoid the High Income Child Benefit Charge by paying themselves differently?
A3: In my experience, the only way to dodge or reduce it is by keeping adjusted net income below the threshold—perhaps by reducing dividend draws or directing more income into pension contributions. But watch that pension annual allowance—it has its own limits.
Q4: Can someone with rental income and company dividends avoid Self Assessment mistakes?
A4: It’s a common mix-up, but here’s the fix: ensure your rental income appears on your Self Assessment. I had a freelance graphic designer in Bristol whose total tax bill surprised her—it wasn’t the dividends, but unreported Airbnb income that tripped her up.
Q5: Can someone reclaim overpaid tax from a director’s loan misstep?
A5: Absolutely—but timing matters. If you pay interest or repay the loan promptly, a relief can be claimed via your company’s tax return. I had a client in Sheffield who avoided a large penalty just by submitting the right adjustments before year-end.
Q6: Can someone in Scotland see dividend taxes calculated differently than in England?
A6: In practice, the personal allowance and tax rates may differ regionally, but dividends are taxed UK-wide. That said, I once advised a director in Edinburgh who failed to account for Scotland’s higher intermediate rate—so their net take-home was noticeably lower than expected.
Q7: Can someone pay themselves via company car instead of cash without triggering extra tax?
A7: It’s worth noting that company cars are taxed via benefit-in-kind rules (P11D). In my years advising clients in London, I’ve seen this used carefully—to save personal cash—but only if you factor in the mileage charge and file it properly.
Q8: Can someone preserve personal allowance by using spouse’s tax band?
A8: In my experience, issuing a small share of dividends to a lower-earning spouse can be a smart move. But make sure the spouse actually receives and declares them—that was the snag one client in Cardiff hit when HMRC red-flagged undeclared dividends.
Q9: Can someone working between England and Wales use only one tax regime?
A9: Here’s the thing: your tax code comes from your home-nation; moving home mid-year may complicate things. I had a client whose code didn’t update until they told HMRC—so he was taxed under English bands while living in Wales.
Q10: Can someone avoid VAT registration if their turnover fluctuates around the threshold?
A10: The law’s clear: registration is compulsory once turnover exceeds the threshold in a 12-month period. A client in Newcastle kept missing registrations by chunking invoices—but that triggered penalties. Best to monitor rolling turnover monthly.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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