Operating as a Limited Company – key tax points for law firms in 2026

What’s Happening

More than ever, law firms are now operating through limited companies. SRA statistics show that, as of late 2025, around 58% of regulated law firms are incorporated companies, compared to around 38%, 10 years ago, in 2015. That number is steadily increasing.

During this time, the tax landscape has shifted:

• From 1 April 2023, the UK transitioned from a single corporation tax rate to a small profits rate (19%), a main rate (25%) and a marginal relief between the two.
• The temporary “super-deduction” and enhanced allowances (April 2021 – March 2023) have been replaced by full expensing and a 50% first-year allowance, which has now been made permanent.
• The section 455 tax rate based on loans to participants in close companies is 33.75% for loans made on or after 6^th April 2022, accompanied by new anti-avoidance rules legislated in 2024.
• HMRC’s official rate of interest for beneficial loans rose from 2.25% to 3.75% on 6^th April 2025, which is now being reviewed every quarter.

For incorporated law firms, these changes are paired alongside existing rules on shares, loans, personal expenses and associated companies.

Why It Matters

For many firms, the decision to choose incorporation was primarily driven by commercial or succession planning motives. Though, once your firm is in a company structure, the real pressure points often become:

• Unexpected income tax and NIC charges for changes in shares (promotions, exits, new equity).
• Section 455 charges where directors’ or shareholders’ loans become overdrawn.
• Benefits in kind on personal expenses or low-interest loans.
• Heightened effective corporation tax rates paired with earlier entry into quarterly instalments, especially in cases where other companies are associated.
• Missed or incorrectly claimed capital allowances on IT, fit-out and other investment.

For practices in their growth stage, these issues directly affect drawings, cashflow and partner expectations. Subsequently meaning, these issues need active management, not just a tidy-up at year-end.

How It Works

The main areas to keep on your radar if you’re operating as a limited company are:

1. Share changes and employment-related securities (ERS)

When shares are acquired or disposed of by directors or employees, the ERS rules may apply. If shares are given, transferred or restructured at a value lower than market standards, the discount is to be treated as employment income, giving rise to income tax and NIC – it could also potentially be an employer NIC cost for the company.

This is relevant whenever you:

• Admit or promote partners via shares.
• Alter classes of shares to change profit shares.
• Buy out retiring shareholders.

It’s always good practice to obtain a viable valuation, structure changes carefully and to file any required ERS returns on or before the due date.

2. Company purchase of own shares

When retiring or exiting a company, it’s common for the company to buy back a shareholder’s shares. If the required conditions are not met, the amount received is usually taxed in the same manner as a dividend. When tests on motive, percentage reduction and ongoing involvement are satisfied, the proceeds can then be taxed as capital gains, more often or not leading to a lower tax rate.

HMRC’s advance clearance is strongly recommended, given that you’re aiming for capital treatment.

3. Loans to directors and shareholders

There are two separate tax considerations:

• Beneficial loans – if a director or employee has a loan that exceeds £10,000 with little to no interest at any point during the tax year, a taxable benefit in kind normally arises, calculated using the official rate (3.75% from 6 April 2025, previously 2.25%).
• Section 455 loans to participants – if you have a close company (which most law firms are) and have an overdrawn shareholder loan which has been left outstanding more than nine months after the year end, it must be taxed at 33.75% of the outstanding balance. That tax is repayable, but only once the loan is cleared, legislation in October 2024 tightened anti-avoidance rules around accessing that relief.

For law firms that utilise director/shareholder loan accounts in order to obtain a flexible “buffer”, monitoring is required regularly, same goes for planning clearance (often via bonuses or dividends).

4. Personal expenses and benefits

Companies that pay for or reimburses personal expenses for directors or staff, are generally taxable either as:

• employment income (with PAYE/NIC), or
• dividends (if treated as drawings by a shareholder).

Some firms initially treat these costs as loans, then clear them later with dividends or bonuses. This is an option, but if there’s a balance left outstanding it could have a potential loan benefit and/or section 455 exposure as well.

5. Corporation tax rates, associated companies and payment timing

From 1^st April 2023:

• Profits up to £50,000 – 19% small profits rate.
• Profits over £250,000 – 25% main rate.
• Profits between – effective rate between 19% and 25% using marginal relief.

The profit limits are divided by the number of associated companies – more broadly, companies under common control. Simply put, if the owners of your law firm also control property companies or service companies, you can hit higher rates and quarterly instalment thresholds, with much lower profit levels.

With regard to payment timing, SMEs typically pay their CT nine months and one day after the year end. Large and very large companies have an obligation to pay via quarterly instalments, with very large companies paying all four instalments throughout the year. The specific thresholds will depend on profits as well as the number of companies associated.

6. Capital allowances and full expensing

The temporary “super-deduction” (130%) and enhanced allowances were in action from 1 April 2021 to 31 March 2023 and have now come to an end.

Since 1^st April 2023, companies have been able to claim for:

• Full expensing – 100% first-year allowance for the majority of new main-rate plant and machinery.
• A 50% first-year allowance for new special-rate assets.

Originally, these were due to come to an end in 2026 but has transitioned into being permanent via the Autumn Statement 2023 and subsequent legislation.

For firms, this can cover spend on IT, certain fixtures and other equipment – often giving a 25p tax saving for every £1 invested, wherein, you’re paying the main 25% rate.

Who’s Affected

• Law firms trading as limited companies (including ABSs).
• Partnerships / sole practices considering incorporation.
• Firms where ownership or profit-sharing changes regularly.
• Owners with multiple companies (service companies, property SPVs, consultancy vehicles, etc).
• Practices that use director/shareholder loan accounts as part of their drawings model.

When It Applies

• Corporation tax rate changes – accounting periods from 1^st April 2023 onwards.
• Full expensing / 50% FYA – applies to qualifying expenditure from 1^st April 2023, revoked 2026 end date.
• Section 455 at 33.75% – loans made on or after 6^th April 2022 and still outstanding nine months after the year end.
• Official rate 3.75% – beneficial loans from 6^th April 2025, with quarterly review points each January, April, July and October.

How DSK Accountants Can Help

Are you in need of clarity on your company structure or tax position? DSK Accountants can help you plan efficiently, manage risks and optimise reliefs. Get in touch to speak to our specialists today.