Partnership or limited company is the first structural question every dental principal asks, and it rarely gets a clean answer because the right answer depends on six or seven variables that interact: NHS Pension membership, expected practice profit, whether your spouse can be employed, future sale plans, and the rate position for the next two tax years.
This guide is the practical UK 2025/26 comparison. We cover what each structure costs in tax at typical principal profit levels, what NHS Pension membership does to the decision, how to extract profit cleanly through salary, dividend and pension contributions, and the cases where one structure clearly wins over the other.
The three main structures
Sole-trader (or general partnership)
The default if you've never restructured. You are personally taxed on your share of practice profit at income tax + Class 2/4 NI rates. Simple to administer; no separate corporate accounts; profit and tax flow through to you personally each year.
For a single principal, "sole trader" applies. For two or more principals sharing the practice, it's a "general partnership" — same tax treatment, profit share defined by the partnership agreement.
LLP (Limited Liability Partnership)
Same tax treatment as a general partnership (each partner pays personal tax on their share) but with limited liability protection. Members are taxed personally; the LLP itself doesn't pay corporation tax. LLP is often the right structure for a two- to four-principal practice that wants the limited liability cover without losing the tax simplicity of a partnership.
Limited company
The practice is owned by a company; the principal(s) are shareholders and directors. The company pays corporation tax on its profits; the principal extracts profit via salary (PAYE) and/or dividends. The two layers of tax (corporation tax + dividend tax) replace the single layer (personal income tax + NI).
The headline tax comparison at 2025/26 rates
Headline rates only — the full position depends on personal allowance, pensions, and other income. But this gives the broad shape:
Sole-trader / partnership
- Personal allowance: £12,570 (tapered away above £100,000 of income)
- Basic rate: 20% on income £12,571 to £50,270
- Higher rate: 40% on income £50,271 to £125,140
- Additional rate: 45% above £125,140
- Class 4 NI: 6% on profits £12,570 to £50,270; 2% above £50,270
Combined marginal rates: basic-rate 26% (20%+6%), higher-rate 42% (40%+2%), additional-rate 47%.
Limited company
- Corporation tax: 19% on profits up to £50,000, marginal-relief tapered between £50,000-£250,000, 25% on profits above £250,000
- Dividend tax (on the dividend received after the company has paid corporation tax): basic rate 8.75%, higher rate 33.75%, additional rate 39.35%, dividend allowance £500
- Director's salary: PAYE income tax + employee NI + employer NI as for any employee
Combined effective rates on profit (illustrative)
For a principal extracting all profit each year via small salary + dividend, the combined effective rate on each £1 of practice profit is approximately:
- Practice profit £40,000 (basic-rate principal): ~26% sole-trader vs ~26% Ltd (negligible difference at this level)
- Practice profit £80,000 (higher-rate principal): ~38% sole-trader vs ~37% Ltd (broadly equal)
- Practice profit £150,000 (additional-rate principal): ~43% sole-trader vs ~42% Ltd (broadly equal)
These numbers are illustrative — actual position depends on the precise extraction strategy, personal allowance taper, and other income. The point is: the headline tax saving from incorporation alone is small in 2025/26. The reasons to incorporate are usually about other factors: NHS Pension flexibility, retained earnings for practice investment, spouse employment, future sale planning.
What NHS Pension membership does to the decision
NHS Pension is the variable that most often tips the answer for dentists.
NHS Pension and pensionable earnings
NHS Pension contributions accrue on "pensionable earnings", which for dentists broadly means net NHS earnings (subject to scheme rules and the practitioner-vs-officer distinction). The McCloud remedy has reset some historic positions; the 2015 section is the current accrual section for active members.
In a sole-trader or partnership structure, the principal's share of NHS-derived practice profit is generally pensionable. The principal pays pension contributions (employee + employer share via the GDS contract mechanism in England) on that NHS profit and accrues a pension benefit each year.
In a limited company structure, only the principal's PAYE salary is pensionable, not the dividend. If the principal extracts most of their NHS-derived income via dividend, very little of it accrues NHS Pension benefit. Over a 10-15 year window approaching retirement, this can mean tens of thousands of pounds less in eventual pension.
The "incorporated NHS Pension problem"
There is no clean way around this. A few practices structure as follows: principal takes a PAYE salary at a level that covers their full NHS-derived income, the rest of the practice profit (private) is extracted via dividend. This salary stacking captures pension accrual on the NHS portion. But it leaves limited room for tax-efficient extraction of the NHS-derived profit (it all goes through PAYE at higher-rate income tax + NI).
The pension-loss-vs-tax-saving question has to be modelled individually. Two principals with identical profits can rationally reach opposite conclusions: one prioritises pension and stays partnership, one prioritises near-term tax efficiency and incorporates.
Spouse employment
Both structures allow you to employ a spouse, and both benefit from a market-rate spouse salary that shifts taxable income from the principal's higher-rate marginal position to the spouse's lower-rate position.
The rule HMRC applies: the work must be genuine and the salary must reflect market rate. Practice management, bookkeeping, marketing, compliance and HR administration are all defensible roles. Document the hours and duties. Pay through PAYE properly. Avoid round-number "for tax" salaries that don't relate to actual work.
Sensible salary ranges (defensible against an HMRC enquiry):
- Part-time bookkeeping + admin (8-12 hours/week): £12,570-£18,000
- Practice manager role with HR + compliance responsibility: £24,000-£35,000
- Full-time practice management at multi-surgery practice: £30,000-£45,000
The salary deducts from practice profit at the principal's marginal rate (typically 40-45%) and is taxed in the spouse's hands at typically 20%, sometimes 0% if it's below their personal allowance. The household saves the difference.
Retained earnings and reinvestment
One genuine advantage of a limited company is that profit retained inside the company is taxed only at corporation tax (19% small-profits, up to 25% main-rate). The principal can leave money in the company for practice investment (new equipment, surgery refit, second practice acquisition) without first paying personal income tax on it.
In a partnership or sole-trader structure, all profit flows through to the principal personally each year and is taxed at personal rates regardless of whether it's withdrawn. Reinvesting in the practice from after-tax personal funds is more expensive than reinvesting from corporate funds.
This is a real point in favour of the limited company structure for principals who are actively expanding (acquiring a second practice, fitting out additional surgeries, investing in advanced equipment).
Sale planning
The structure at the point of sale affects the disposal tax position. See the goodwill valuation and sale playbook for the full detail.
Briefly:
- Unincorporated sale: asset sale of the trade. CGT on goodwill disposal. BADR may apply on qualifying assets.
- Incorporated sale: typically a share sale. CGT on share disposal. BADR may apply on the share gain if conditions are met (5%+ ownership, employee/officer, 2-year qualifying period).
- Pre-sale incorporation via Section 162: defers CGT on goodwill into the share base cost; share sale 2+ years later may then qualify for BADR.
The BADR rate rises from 14% to 18% on 6 April 2026. If you're planning a sale in late 2025/26, the structure-at-sale needs to be decided now, not in the run-up.
The principal's extraction strategy in a limited company
For an incorporated dental principal in 2025/26, a typical extraction looks like:
Step 1: Director's salary at the optimal level
Pay yourself a director's salary at £12,570 (the personal allowance — no income tax) up to perhaps £30,000 if you want NHS Pension pensionable earnings to be higher. Above that, additional salary is more expensive than dividend because of employer NI on the salary.
Step 2: Employer pension contribution
The company can pay an employer pension contribution into your personal pension. Employer pension contributions are deductible from the company's corporation tax bill, are not subject to income tax or NI on the way in, and grow inside the pension wrapper. The annual allowance is £60,000 (2025/26), tapered down to £10,000 for high earners under the threshold income rules. For most dental principals, £40,000-£60,000 per year of employer pension contribution is achievable and tax-efficient.
Step 3: Dividends to use the dividend allowance + basic-rate band
£500 dividend allowance (0% tax) + dividend up to the top of the basic-rate band (taxed at 8.75% dividend tax) is the cheapest extraction beyond salary. Subsequent dividend in the higher-rate band is at 33.75% — still cheaper than the equivalent salary (which would attract income tax + NI + employer NI).
Step 4: Retained earnings for reinvestment
What you don't need personally can stay in the company at corporation tax rate, available for practice reinvestment or as a future capital extraction (BADR on disposal of shares, subject to conditions).
Decision framework
A simple decision framework, used as a starting point and refined for individual circumstances:
Stay partnership / sole-trader if:
- You have 10+ years of NHS Pension service and value continued accrual on full earnings
- Practice profit is below £80,000 sustainably
- You don't have a spouse who can be employed
- You don't plan to reinvest significantly in the practice (no expansion, no acquisition)
- You're approaching retirement and want extraction simplicity
Incorporate if:
- Practice profit sustainably above £100,000-£120,000 with growth ahead
- Multiple shareholders make sense (spouse, future partners)
- You're actively expanding (acquisition, refit, scaling)
- NHS Pension is less central to your overall retirement plan (smaller historical service or you have substantial other pension provision)
- Future sale planning benefits from a share-sale-friendly structure
LLP makes sense if:
- 2-4 principals sharing the practice
- All want personal tax treatment + limited liability
- NHS Pension membership is valued by all partners
- The partnership agreement can flexibly accommodate retirements, additions, profit-share changes
What we'd do if you brought us in
Our structure-review engagement covers:
- Three-structure tax comparison on your actual 2025/26 profit (sole-trader, LLP, limited company)
- NHS Pension impact modelling: lost or preserved accrual over the next 10 years
- Extraction strategy if Ltd is the chosen route: salary level, pension contribution, dividend timing
- Spouse employment defensibility review
- Pre-sale alignment if exit is on the 5-10 year horizon
The output is a written recommendation with the numbers, not a generic answer. Book a 30-minute scoping call via the form below.