Why You Should Be a Limited Company in 2027

Summary

The video argues that 2027 is a timely point for UK sole traders, landlords and growing businesses to review their structure. A limited company may offer more flexibility to retain and reinvest profits, separate business assets from personal finances, and plan for growth or an eventual sale. However, incorporation is not automatically more tax-efficient: the right choice depends on profits, how much the owner needs to withdraw, future plans and the costs of running a company.

Key Changes and Tax Considerations

• Making Tax Digital (MTD): From April 2027, the video says sole traders and landlords with qualifying income above £30,000 will generally need digital records, quarterly updates to HMRC and compatible software for their annual return. The threshold is based on income, not profit, and income from multiple sources may be combined. Limited companies are not included in MTD for Income Tax, though they have their own reporting obligations.
• Personal rental income rates: The video says announced rates from April 2027 are 22%, 42% and 47%. It contrasts these with corporation tax rates of 19%–25% on qualifying company profits, while stressing that the rates are not directly comparable if company profits are later withdrawn personally.
• Mortgage interest: For personally owned residential rentals, mortgage interest is generally not deducted directly when calculating taxable profit; a restricted basic-rate tax reduction may apply. A company can generally deduct qualifying interest as a business expense.
• Company sale and succession: The video discusses Business Asset Disposal Relief (BADR), saying its rate increased to 18% from April 2026 for qualifying gains, compared with a stated 24% higher rate for many other gains. It gives a £1 million lifetime limit for qualifying gains. It also notes that qualifying business and agricultural assets may receive inheritance-tax relief, subject to the rules and limits described in the video.

Business Structure and Profit-Retention Playbook

Compare the Whole Tax and Operating Picture

Before incorporating, consider:

• Annual profits and how much cash the owner needs to withdraw.
• Whether surplus funds will be reinvested in the business, pensions, property or other investments.
• Company administration and accountancy costs, payroll and Companies House filings.
• IR35 for contractors and freelancers: using a company does not by itself change their tax status.

Use Retained Profits Deliberately

A company can pay corporation tax and retain post-tax profits for business investment without automatically triggering personal dividend tax. This is principally about control over the timing of personal tax, not making tax disappear.

Consider a Holding-Company Structure as the Business Grows

A group might have a holding company above a trading company and a separate investment company. Subject to legal and tax rules, the trading company may pay a dividend to the holding company, which can then fund investment activity.

• The video’s example uses £50,000 of distributable post-tax profits transferred to a holding company and then used to fund an investment subsidiary.
• Intercompany transfers must be properly documented; companies are separate legal entities, not a shared bank account.
• Separating trading risks from investments may help protect accumulated assets and make a future sale clearer, but it is not complete protection. Guarantees, company management and tax-relief conditions matter.

Plan Before Restructuring

Putting a holding company above an existing company may have tax consequences and may require specialist advice, reliefs or HMRC clearance. Multiple companies also add administration and accounting costs.

Plan the Exit Early

Share ownership can give options for a future sale or family succession, but the structure and asset mix may affect eligibility for reliefs. Investment-heavy activities or assets may not qualify for some business reliefs.

Examples and Figures from the Video

• £100,000 annual profit comparison: The video estimates that a sole trader with no other income would pay about £30,689 in income tax and Class 4 National Insurance, leaving roughly £69,300. A limited company with the same taxable profit is estimated to pay about £22,750 in corporation tax under the assumptions given, leaving £77,250 inside the company. The presenter cautions that this is not an £8,000 personal tax saving: the retained funds belong to the company, and taking them out may trigger further tax.
• Pension contributions: A company might contribute £30,000 of surplus profits directly to an employee’s pension, subject to HMRC rules. At a 19% corporation tax rate, the video estimates a potential £5,700 corporation-tax saving. It cites a standard annual allowance of £60,000, which can be lower in some circumstances. Pension funds are generally locked away until retirement age; sole traders can also receive tax relief on personal pension contributions.
• Rental-property example: For rent of £20,000, mortgage interest of £8,000 and other allowable expenses of £2,000, the video calculates £10,000 cash profit:
  • Personally owned by a higher-rate taxpayer: It estimates £5,960 tax after applying the stated mortgage-interest tax reduction, leaving £4,040.
  • Company-owned at a 19% corporation tax rate: It estimates £1,900 corporation tax, leaving £8,100 in the company for reinvestment. Withdrawing that money personally could create further tax.
• Existing property portfolios: Transferring personally owned properties to a company can involve capital gains tax, stamp duty land tax and refinancing costs. The video recommends comparing structures before buying future properties rather than assuming existing assets should be transferred.
• BADR illustration: On a qualifying £500,000 gain, the video compares 18% tax (£90,000) with 24% (£120,000), a potential £30,000 difference, subject to eligibility and the lifetime limit.

Practical Recommendations and Cautions

• Review the structure if profits regularly exceed what the owner needs for personal spending, or if the business intends to reinvest and grow.
• Model the combined tax cost of company profits and personal withdrawals; do not compare corporation tax alone with sole-trader tax.
• Get advice before setting up a group structure, moving money between companies or transferring property.
• A sole-trader structure may remain preferable when profits are around £30,000–£40,000 and most or all income must be withdrawn, given potential dividend or salary taxes and additional company costs.
• Limited liability is not absolute: personal guarantees and director misconduct can create personal exposure. Likewise, holding-company structures do not make assets untouchable.

Presenter/source: Michelle Eames, Helpbox UK.