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Practice profit extraction guide: sole trader vs limited company 2026/27
A clear comparison of extracting dental practice profit as a sole trader or partnership versus through a limited company, with the NHS Pension impact made explicit.
Tax year: 2026/27. Last reviewed: July 2025.
Profit extraction model (Excel)The extraction decision
Most dental principals operate either as a sole trader, in partnership, or through a limited company. The tax payable depends on the structure and on how you extract profit from it. This guide compares the two main routes at 2026/27 rates and explains the NHS Pension issue that the headline numbers do not capture.
Sole trader or partnership: how the tax works
A sole trader pays income tax on all practice profit in the year it is earned, regardless of how much is drawn out. The 2026/27 bands are as follows.
- Personal allowance: the first £12,570 of profit is tax-free.
- Basic rate: 20% from £12,570 to £50,270.
- Higher rate: 40% from £50,270 to £125,140.
- Additional rate: 45% above £125,140.
The personal allowance tapers away for profits above £100,000 at £1 for every £2 above the threshold. Class 4 NI applies at 6% between £12,570 and £50,270, and 2% above. Class 2 NI at £3.45 a week applies if profit exceeds £6,725.
There is no employer NI, no corporation tax and no dividend tax. The structure is simple and the NHS Pension accrues on your full net pensionable earnings.
Limited company: the mechanics
A dental company pays corporation tax on its profits at 19% (below £50,000) or 25% (above £250,000), with marginal relief between those thresholds. You as director then draw a salary and dividends.
The most common approach for a single-director dental company at 2026/27 rates is as follows.
- Director salary: typically £12,570, equal to the income tax personal allowance. This is above the secondary threshold (£5,000 from April 2025), so it triggers employer NI at 15% on the excess.
- Employer NI on that salary: (£12,570 less £5,000) times 15% equals £1,135.50 per year.
- The remaining profit after salary, employer NI and admin costs is subject to corporation tax.
- After-tax profit is paid as a dividend.
Dividends are taxed at 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate) from 6 April 2026, with a £500 dividend allowance. These rates increased by 2 percentage points under FA 2026.
Side by side: the same profit, two structures
At a practice profit of £120,000 in 2026/27, the rough comparison is as follows. These are approximations: your exact position depends on other income, pension contributions and allowable costs.
- Sole trader: income tax around £35,432, Class 4 NI around £3,657, Class 2 around £179. Net in pocket approximately £80,732.
- Limited company (salary plus dividends, no pension, admin cost £2,500): total tax, NI and costs somewhat higher than the sole trader route once the corporation tax, dividend tax and employer NI are combined. Net in pocket somewhat lower.
At moderate profit levels, the sole trader route is typically comparable to or better than the limited company after all taxes and admin costs are accounted for. The gap widens in the company's favour only at higher profit levels where a larger share of profit sits in the additional-rate band.
The NHS Pension trap
The NHS Pension is defined benefit and accrues at a rate of approximately 1/54 of your net pensionable earnings each year under the 2015 scheme. For a sole trader or partner, the full practice profit (net of allowable expenses) is pensionable up to the net pensionable earnings ceiling.
For an incorporated associate or a limited-company principal, dividends are not pensionable. Pension accrual is based only on the salary you draw, not on retained profit or dividends. At a salary of £12,570, your annual accrual is approximately £233, compared with roughly £2,222 at a sole trader profit of £120,000.
Over a 10 to 15 year period to retirement, that difference in accrual can amount to tens of thousands of pounds in pension income. Whether the tax saving in the company is greater or smaller than the lost pension depends on your individual career length, profit trajectory and retirement age. The decision should always be modelled rather than assumed.
Director's loan accounts
If you draw more from the company than your salary and declared dividends, the excess goes on a director's loan account. An overdrawn loan outstanding nine months and one day after the company's year end triggers a section 455 charge at 33.75% on 2025/26 loans, rising to 35.75% for loans made on or after 6 April 2026. The charge is repayable once the loan is cleared, but the cash flow impact can be significant. A loan over £10,000 is also a taxable benefit in kind.
Timing a restructuring
If you are considering incorporating, the optimal timing depends on your current profit trajectory, pension position and intended retirement date. Incorporating partway through a financial year requires care with the treatment of pre-incorporation profits and the timing of the NHS Pension transfer. A specialist can model the transition for your specific figures.
Next steps
The Excel model that came with this guide applies the comparison above to your own profit figure. Use it as a starting point, then speak to a specialist who can factor in your NHS Pension, other income and pension contributions.
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The guide gives you the framework. A specialist dental accountant can confirm the numbers for your specific practice, check any reliefs that apply, and advise on the best timing. The first call is free and with no obligation.