From 6 April 2026 the ordinary dividend rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. For a law firm weighing a company against an LLP, the answer now depends far more on whether profits are drawn or retained.
Article · 29 June 2026
From 6 April 2026 the dividend rates changed. The ordinary rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The additional rate is unchanged at 39.35%, and the dividend allowance stays at £500. The change was announced at Budget 2025.
For a law firm that is already a limited company and distributes most of what it earns, that is a straightforward increase in the cost of getting money out. For a partnership or LLP weighing incorporation, it is more interesting than that: it narrows the gap enough that the honest answer now turns on a different question entirely — how much of the profit actually leaves the firm.
A member of an LLP is taxed personally on their share of the profit, whether or not they draw it. On top of income tax at 20%, 40% or 45%, they pay Class 4 National Insurance on their profit share at 6% between the lower profits limit of £12,570 and the upper profits limit of £50,270, and at 2% above that. So the marginal cost on profit share is 42% above £50,270 and 47% above £125,140. Drawings are not a taxable event — the tax follows the allocation.
A limited company pays corporation tax first. For the financial year beginning 1 April 2026 the small profits rate is 19% on profits up to £50,000 and the main rate is 25% on profits over £250,000, with marginal relief in between at a standard fraction of 3/200. That produces an effective marginal rate of 26.5% on profits between the two limits. Both limits are reduced proportionately by the number of associated companies, so a firm with a service company and a property company has materially lower limits than it assumes.
Then the money has to come out, at 10.75%, 35.75% or 39.35% depending on the shareholder's other income.
The clearest way to see the effect is to follow the next £1 of profit for a higher-rate partner or shareholder, ignoring the personal allowance taper, the £500 dividend allowance and any salary. These are illustrative figures on 2026/27 rates.
Set out like that, the position is stark. On extraction the company is now clearly worse — 47.2p against 58p. On retention it is clearly better — 73.5p against 58p, because the LLP member is taxed on their allocated share regardless of whether a penny of it leaves the firm. Incorporation has stopped being a way to take the same money more cheaply, and has become a way to keep money more cheaply.
At the additional rate the gap moves again. An LLP member at 45% plus 2% keeps 53p. A company at the small profits rate of 19% distributing at 39.35% leaves 49.1p; at the main rate of 25% it leaves 45.5p. Extraction loses on both.
Corporation tax rates for the financial year beginning 1 April 2026, income tax and Class 4 National Insurance rates and dividend rates for 2026/27. The income tax thresholds are frozen until 5 April 2031 following Budget 2025, which quietly increases the effective rate on rising partner profit shares every year. The LLP versus limited company calculator runs these rates against your own profit figure.
Three things matter as much as the arithmetic, and none of them appears in a spreadsheet.
Under the SRA Authorisation of Firms Rules, a firm in which all managers and interest holders are legally qualified can be a recognised body. If any non-lawyer holds an ownership interest or is a manager, the firm cannot be a recognised body and must be authorised as a licensed body — an ABS — which is a different and more onerous route. Rule 9.1 requires SRA approval of any manager or owner. A share structure that puts 20% with a non-lawyer spouse for tax reasons changes the firm's authorisation category, not just its tax return.
The Minimum Terms and Conditions set the minimum sum insured for any one claim, exclusive of defence costs, at £3 million for a relevant recognised body or relevant licensed body and £2 million in all other cases. In practice that means LLPs and limited companies need £3m, while sole practitioners and traditional partnerships of individuals need £2m. There is no monetary limit on defence costs, and six years of run-off cover is required on cessation.
Rule 1.2 of the Accounts Rules states that the authorised body's managers are jointly and severally responsible for compliance by the body, its managers and its employees. A limited company does not put a wall between the individuals and the client account. This is a common misconception and worth saying out loud before anyone incorporates expecting one — the obligations that follow the managers whatever the entity are set out in our guide to the Accounts Rules.
Ask what the firm does with its profit. A firm that distributes essentially everything each year, because the partners need the income, gets very little from a company and now pays more to extract. A firm that wants to retain — to fund lockup, to buy a book of work, to build a deposit for premises, to carry the cash cost of a growing conveyancing department — keeps 73.5p of every marginal pound instead of 58p, and that difference compounds.
The second question is what the firm's lockup looks like, because a firm with heavy work in progress and slow debtors is financing its own growth out of taxed profit either way. That is usually a bigger number than the structure question, and it is covered in our lockup guide.
The full trade-off, including the tax transparency point, the payments on account timing and the filing consequences, is set out on our LLP versus limited company page. If you want the numbers on your own profit share rather than on a marginal pound, run the calculator, then use the partner drawings and tax calculator to see what it does to reserves. This is information rather than advice, and a structure decision deserves a proper calculation on your firm's real figures.
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The ordinary dividend rate rose from 8.75% to 10.75% and the upper rate rose from 33.75% to 35.75%. The additional rate is unchanged at 39.35%, and the dividend allowance remains at £500. The change was announced at Budget 2025 and applies from the start of the 2026/27 tax year. Nothing changed for partnership or LLP profit shares, which continue to be taxed at income tax rates with Class 4 National Insurance on top. The practical effect is to make extracting profit from a company more expensive while leaving the cost of retaining profit inside a company exactly where it was.
It means the reason has changed. On extraction the company is now clearly worse for a higher-rate taxpayer: a marginal pound of company profit distributed as a dividend leaves about 47.2p against 58p for an LLP member, on illustrative 2026/27 rates. On retention the company is clearly better, because 73.5p of that pound stays in the business while an LLP member is taxed on their full allocated share whether they draw it or not. So a firm that distributes everything gains little, and a firm that wants to fund lockup, hires or an acquisition from retained profit gains a great deal.
It is the effective marginal rate of corporation tax between the two limits. The small profits rate is 19% on profits up to £50,000 and the main rate is 25% on profits over £250,000, with marginal relief applied in between at a standard fraction of 3/200. The arithmetic of that relief means each additional pound of profit in the band between £50,000 and £250,000 effectively bears 26.5% tax. Both limits are reduced proportionately by the number of associated companies, so a firm with a service company or a property company will hit the higher rates on lower profits than it expects.
No. Rule 1.2 of the SRA Accounts Rules provides that the authorised body's managers are jointly and severally responsible for compliance by the body, its managers and its employees. Incorporation gives limited liability for the firm's commercial debts; it does not insulate individuals from responsibility for the Accounts Rules. There are two further regulatory consequences worth knowing before changing structure: if a non-lawyer holds an ownership interest the firm must be authorised as a licensed body rather than a recognised body, and the minimum sum insured for any one claim is £3 million for a recognised or licensed body against £2 million otherwise.
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