Should driving instructors still run a limited company after the 2026 dividend tax rise?
For years the pitch for incorporating went like this: pay yourself a small salary, take the rest as dividends, and pay less than you would as a sole trader. For a solo ADI who takes every pound out, that pitch no longer works on our numbers.
The Budget on 26 November 2025 raised dividend tax by 2 percentage points for basic and higher rate taxpayers from 6 April 2026 (HM Treasury). Add the £500 dividend allowance, 15% employer National Insurance on salary above £5,000, and Corporation Tax of 19% to 25%, and the company route now costs more tax than being self-employed at every profit level we tested.
This guide sets out the 2026-27 rates, works through two examples, and covers when a company still earns its keep.
The headline change
Dividend tax rates for 2026-27 (GOV.UK):
| Band | 2025-26 | 2026-27 | Change |
|---|---|---|---|
| Basic rate | 8.75% | 10.75% | +2 points |
| Higher rate | 33.75% | 35.75% | +2 points |
| Additional rate | 39.35% | 39.35% | None |
The dividend allowance, the slice of dividends taxed at 0%, stays at £500 (HMRC). It was £5,000 when it started in April 2016, fell to £2,000 from April 2018, £1,000 from April 2023 and £500 from April 2024 (HMRC, 2016; HMRC, 2022).
The Treasury's stated reason is to "narrow this gap between tax paid on work and tax paid on income from assets". Anyone planning around dividends should read that as a direction of travel.
Corporation Tax is unchanged (GOV.UK):
| Company profit | Rate |
|---|---|
| £50,000 or less | 19% (small profits rate) |
| £50,000 to £250,000 | 25% with Marginal Relief (26.5% on each pound in this band) |
| Over £250,000 | 25% |
The sole trader baseline
Income Tax in England, Wales and Northern Ireland for 2026-27 (HMRC):
| Taxable profit | Rate |
|---|---|
| Up to £12,570 | 0% (Personal Allowance) |
| £12,571 to £50,270 | 20% |
| £50,271 to £125,140 | 40% |
| Over £125,140 | 45% |
The Personal Allowance shrinks by £1 for every £2 of income over £100,000. Scotland has its own bands.
Class 4 National Insurance for 2026-27 is 6% on profits between £12,570 and £50,270 and 2% above that (GOV.UK). If your profits are £7,105 or more, Class 2 is treated as paid, so there is no weekly charge.
Worked example: £35,000 profit
A full-time ADI takes £50,000 in lesson fees and spends £15,000 on fuel, insurance, the car, phone and software. Profit: £35,000. We assume no other income.
As a sole trader
- Income Tax: £22,430 above the Personal Allowance at 20% = £4,486
- Class 4 NI: £22,430 at 6% = £1,346
- Total: £5,832. Take-home: £29,168
As a limited company
One director, no other employees. A company whose only employee paid above the secondary threshold is its sole director can't claim Employment Allowance (GOV.UK), so employer NI of 15% applies above £5,000 (HMRC). A £12,570 salary came out cheaper overall than £5,000 in both our examples.
- Salary: £12,570 (no Income Tax or employee NI: it sits at the Personal Allowance and primary threshold)
- Employer NI: £7,570 at 15% = £1,136
- Company profit after salary and NI: £21,295
- Corporation Tax at 19%: £4,046
- Dividend paid out: £17,249
- Dividend tax: £16,749 above the £500 allowance at 10.75% = £1,800
- Total: £6,982. Take-home: £28,018
The sole trader keeps £1,150 more. At last year's 8.75% dividend rate the gap was £815. The rise cost the company route £335 here, and the company was already behind.
Worked example: £55,000 profit
Same instructor, busier diary: £55,000 profit.
As a sole trader
- Income Tax: £37,700 at 20% = £7,540, plus £4,730 at 40% = £1,892
- Class 4 NI: £37,700 at 6% = £2,262, plus £4,730 at 2% = £95
- Total: £11,789. Take-home: £43,211
As a limited company
- Salary: £12,570
- Employer NI: £1,136
- Company profit after salary and NI: £41,295
- Corporation Tax at 19%: £7,846
- Dividend paid out: £33,449 (total income £46,019, so all in the basic rate band)
- Dividend tax: £32,949 at 10.75% = £3,542
- Total: £12,523. Take-home: £42,477
The sole trader keeps £734 more. At 8.75% the sole trader was ahead by £76.
Where the break-even went
We ran the same model from £20,000 to £100,000 of profit in £1,000 steps, testing both a £5,000 and a £12,570 salary. At 2026-27 rates the company never came out ahead. It got closest at about £60,000 of profit, where it paid roughly £20 more than a sole trader.
At 2025-26 dividend rates there was a narrow window, from about £56,000 to £70,000 of profit, where the company won by up to about £730 a year. The 2 point rise closed it.
All of that is before accountant fees, payroll software and your own time, which only a company pays for. The model assumes one director-shareholder with no other income, English rates, and every pound of profit paid out in the same year. Change any of those and the answer can change, which is the point of the next section.
When a limited company can still pay
You leave profit in the company. Profit kept in the company pays Corporation Tax (19% on up to £50,000) and no personal tax until you take it out. If you're building a school, buying a second car or paying for an associate's training, that deferral is real. A sole trader pays Income Tax and Class 4 on all profit in the year it's made, spent or not.
Pension contributions through the company. An employer contribution is normally a company expense, so it reduces Corporation Tax, provided it passes HMRC's "wholly and exclusively" test for a controlling director (HMRC manual). A sole trader gets Income Tax relief on personal contributions, but that relief doesn't touch Class 4 NI.
Shares held by a spouse. A spouse who owns shares and has unused allowances can receive dividends taxed in their own name. HMRC can challenge arrangements under the settlements rules (HMRC manual), so take advice before setting it up.
Limited liability. If you employ staff or run several cars, the company protects your personal assets from business debts. That's a legal reason, not a tax one, and for some schools it decides the question.
When it clearly doesn't
Solo, drawing everything. If you're not reinvesting, not paying a pension through the company and not sharing ownership, our numbers show you pay more tax as a company at every profit level from £20,000 to £100,000, then pay an accountant on top.
Irregular income. Salary runs through payroll and dividends need profits and paperwork behind them. A sole trader draws what's there.
The running costs
| Cost | Amount |
|---|---|
| Companies House confirmation statement (online) | £50 a year (Companies House) |
| Annual accounts to Companies House | Required every year, dormant or not |
| Company Tax Return to HMRC | Required every year |
| Payroll | Required once you pay a salary |
| Accountant | Get a quote. Compare it with the tax figures above |
A sole trader files one Self Assessment return, plus quarterly updates if Making Tax Digital applies to them.
If you're already incorporated
Stay put for now
Nothing forces a change mid-year. Run your own numbers at year end, including anything you plan to keep in the company, and decide then.
Close the company
You can apply to strike the company off at Companies House once it has stopped trading for 3 months (GOV.UK). Share out the assets first: anything left in the company when it is struck off goes to the Crown. If the amount you take out before striking off is £25,000 or less, it can be taxed as a capital gain. Above £25,000 it is treated as income (GOV.UK). Larger balances usually go through a members' voluntary liquidation, which needs an insolvency practitioner.
Business Asset Disposal Relief, where it applies, taxes qualifying gains at 18% from 6 April 2026, up from 14% in 2025-26 (GOV.UK).
Keep it dormant
A company with no significant transactions is dormant for Companies House. It still has to file a confirmation statement (£50 online) and annual accounts, though small dormant companies can file simpler dormant accounts (GOV.UK). This suits you if you expect to take on associates in the next few years and want the company ready.
Where Orbit fits
Orbit is free for instructors. It records your lesson income and expenses, and its Making Tax Digital tools for sole traders are built on HMRC's API, waiting on HMRC's approval before live submissions open. If you trade through a company, Orbit keeps the per-lesson records your accountant needs for the company accounts. It doesn't file Corporation Tax.
To see the sole trader side of the sum on your own figures, try the tax estimator.
Disclaimer
This article is for general information and does not constitute tax, legal, or financial advice. UK tax rules change frequently and individual circumstances vary. Consult a qualified accountant, tax adviser, or HMRC directly for advice specific to your situation. Orbit (listed with HMRC as DrivePro) is built on HMRC's Making Tax Digital for Income Tax API and is completing HMRC's software recognition process; live submissions open once HMRC approves it. It does not provide personalised tax advice.