Entity Setup
Entity Setup in the UK: Choosing Between LLPs, Companies, and Sole Traders with Recent Tax Reforms
Recent government policy has shifted focus on LLPs and company structures in tax and compliance. This article unpacks how vehicle choice, recent announcements, and upcoming rules affect business entities in the UK.
By NomadicTax Research Team • 5-8 min read • November 24, 2025
## Types of entities commonly used in the UK
| Entity Type | Features | Tax & Legal Considerations |
|-------------|----------|------------------------------|
| Sole Trader | Owned by one person; fewer formalities; self-assessment tax and Class 2/4 NICs |
| Partnership / LLP | Partners share profits; LLP offers limited liability; partnership taxation |
| Ltd Company | Separate legal entity; corporation tax; dividends; employee status |
Recent proposals had suggested increases to NI and tax burdens for partners in LLPs. However, the Treasury recently **scrapped a plan** to impose additional national insurance contributions on LLP partners after concerns about tax avoidance and potential relocation. ([ft.com](https://www.ft.com/content/3b99301c-3a66-4592-8bde-ab763ec0e453?utm_source=openai)) Companies and LLPs continue to be under scrutiny. Choices in structure now may influence your exposure to compliance creep.
## Key recent reforms affecting entity setup
- **Liquidation of LLP NI rise plan**: A planned NI rise for LLP partners was cancelled. This shows government caution around tax changes that could push business abroad. ([ft.com](https://www.ft.com/content/3b99301c-3a66-4592-8bde-ab763ec0e453?utm_source=openai))
- **Freeze of personal tax thresholds**: Upcoming Budget is expected to freeze certain thresholds, which could change net income for individuals including those drawing dividends via companies. ([theguardian.com](https://www.theguardian.com/business/2025/nov/14/uk-borrowing-costs-up-after-markets-spooked-by-reeves-income-tax-u-turn?utm_source=openai))
- **VAT Capital Goods Scheme changes**: From 28 April 2025, computers removed from the scheme assets list; capital expenditure value threshold for land, buildings etc. increased from £250,000 to £600,000. This affects companies and LLPs reclaiming VAT on large assets. ([gov.uk](https://www.gov.uk/government/news/valuation-office-agency-scrapped-in-government-drive-to-slash-inefficiencies?utm_source=openai))
## What entity type works best under the new environment
- If you are **high-earning self-employed or partner in LLP**, the liability changes make LTD companies more attractive—but watch for corporation tax and dividend tax implications.
- For **asset-heavy businesses**, the revised Capital Goods Scheme means fewer assets are subject to detailed VAT recovery rules—simplifying cash flow and admin. Entities that reclaim VAT (companies, LLPs, charities) benefit.
- If close to residency or non-dom status, company ownership and profit extraction methods are carefully structured to avoid extra UK tax in future years under the new non-dom regime.
## Practical steps when setting up an entity now
1. **Map your expected income sources and profits**, including salary, dividends, property, intellectual property, to compare effective tax rates across structures.
2. **Estimate tax liability for partners vs. company employees**, factoring in recent scrapped proposals and current thresholds.
3. **Consider cash-flow timing**, especially for VAT and capital purchases, given the new thresholds in CGS.
4. **Keep in mind residency / non-dom rules**, inheritance tax reforms, and what structure can help mitigate future liabilities safely.
5. **Engage a tax adviser early**, particularly where you anticipate rapid growth or international operations.
## Case example
> *TechCo Ltd.* develops software and has three founder partners. Under the proposed LLP NI increase (if it had passed), the partners would have seen much higher tax/NICs liability. With that plan cancelled, setting up Ltd allows them to pay themselves a mixture of modest salaries plus dividends. Additionally, when buying equipment (say £500,000 of hardware and £300,000 renovation to premises), the new CGS rules mean the building works (£300,000) fall under the higher £600,000 threshold, reducing quarterly admin burdens.
## Bottom line
Entity setup in the UK is now more nuanced. Some proposed reforms have been pulled back, but others are live—threshold freezes, VAT scheme changes, non-dom regime reforms—all affect long-term tax cost. The right structure is the one that balances liability, compliance burden, and flexibility—and recent policy moves have emphasised fairness, transparency, and simplifying burdens for smaller entities.