Disincorporation: Is It the Right Move for Your Business in 2025/26?
With changes in tax legislation and the gradual erosion of limited company tax advantages, more small business owners are wondering: Is it time to disincorporate? That is, should I stop trading as a limited company and revert to being a sole trader?
The answer depends on more than just your profit line. Let’s explore the tax differences, key implications, and important planning considerations before making the leap.
The Tax Comparison: Limited Company vs Sole Trader
Take a business with £50,000 profit for example:
| Company | Sole Trader | |
|---|---|---|
| Profit before salary | £50,000 | £50,000 |
| Salary (Personal Allowance) | £12,570 | £0 |
| Corporation Tax | £6,896 | n/a |
| Dividends after tax | £29,398 | n/a |
| Total income (after tax) | £41,968 | £50,000 |
| Personal tax | £2,528 | £9,732 |
| Retained profit | £39,439 | £40,268 |
Result: You might retain more as a sole trader in 2025/26 — but the tax comparison alone isn’t the full story.
Key Considerations Before Disincorporating
1. Capital Allowances
When you cease trading as a company, capital allowance claims stop. Any equipment or assets held by the company must be revalued at market rate. This can result in:
- A balancing allowance (reducing your final tax bill), or
- A balancing charge (increasing it).
Good news: You can make a joint election under CAA 2001, s266 to avoid these charges, allowing assets to transfer at their current written-down value.
2. VAT and TOGC Rules
If the company is VAT registered, disincorporation may qualify as a Transfer of a Going Concern (TOGC). This prevents VAT being charged on transferred stock and assets — but only if:
- The sole trader registers for VAT, or
- The business stays under the threshold but still qualifies.
Warning: If the business isn’t VAT-registered post-disincorporation, VAT will be due on asset transfers — potentially increasing costs significantly.
3. Opted Land and Buildings
Where land or buildings have an option to tax applied:
- VAT at the standard rate applies on transfer.
- This affects Stamp Duty Land Tax, which is charged on the VAT-inclusive price.
The new owner (sole trader) must also consider capital goods scheme adjustments if the property’s use changes after disincorporation.
Capital Gains and Asset Transfers
Disincorporating means assets like land, property, or goodwill transfer from the company to the individual owner. This can result in:
- A chargeable gain, taxed via Corporation Tax.
- No holdover relief is available.
- Reduced base cost if the company previously claimed rollover relief.
Post-April 2002 goodwill is taxed as business income — not a capital gain — and any corporation tax relief already claimed will reduce your allowable cost, increasing your liability.
What About the Shareholders?
Once assets are sold or transferred, any remaining profits need to be extracted before winding up the company.
You have two choices:
Option 1: Take Dividends
- Taxed at 8.75% (basic), 33.75% (higher) or 39.35% (additional)
- Cheaper for basic-rate taxpayers
Option 2: Liquidate the Company
- Subject to Capital Gains Tax
- Potential access to Business Asset Disposal Relief (BADR) at 10%
- May be more tax-efficient for higher-rate taxpayers
Important: If reserves are under £25,000, a simple voluntary strike-off can be used. Over £25,000? You’ll need a formal liquidation, adding to your professional costs.
When Might Disincorporation Be a Good Idea?
You may want to consider disincorporation if:
Your profits are under £50,000
You don’t benefit from limited company-specific reliefs
The admin burden and compliance costs are outweighing tax savings
You’re planning to scale back or retire
You’re exiting VAT and want to simplify reporting
Summary: Disincorporation – Not Just a Tax Decision
Disincorporation can save money — but only if handled properly. You’ll need to weigh:
- Immediate tax savings vs capital gains and VAT charges
- Administrative simplicity vs potential loss of protection
- Flexibility of being a sole trader vs tax reliefs available to companies
At Merranti Accounting, we specialise in strategic business reviews. We’ll help you model your position both as a company and as a sole trader — so you can make a confident, informed decision.
