Whether you decide to operate your farm business as a partnership or company will depend on many factors, but the 2025 Budget has introduced further changes, meaning it’s worth reviewing your current structure and taking family succession plans into account.
Changes for limited companies
If you operate a limited company, you have more flexibility in how you pay yourself – through a regular salary or dividends. However, remuneration planning is not just about tax efficiency. Once you set a precedent for a higher salary, it can be difficult to reverse if tax rates change.
Increased National Insurance Contributions
Those receiving a salary as a company director now pay an increased rate of Class 1 Employer National Insurance Contributions (NICs), which rose to 15% in April 2025, up from 13.8%, as well as employee NICs at 8%. The secondary threshold (the point at which employers start paying NICs) has also reduced from £9,100 to £5,000 annually, meaning employer NICs are now payable on a greater proportion of earnings.
Increased Dividend Taxes
Rachel Reeves announced that dividend tax rates are set to increase from April 2026, meaning the tax advantage of extracting company profits in this way has been further eroded. The basic rate will rise from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%, while the additional rate of 39.35% remains unchanged. The dividend tax-free allowance remains at £500 for 2025/26.
Directors will need to carefully consider the most tax-efficient remuneration strategy, balancing salary (subject to employer NICs at 15%) against dividends (now taxed at higher rates), however, care is always required when making changes to the way directors/shareholders draw a return from a company. HMRC has access to greater amounts of information, but the temptation to swap salary for dividend, or vice versa, without commercial justification must be resisted.
No change to Corporation Tax
Corporation Tax rates remain unchanged. For a farming family with no associated companies:
• Profits up to £50,000 are taxed at 19%
• Profits between £50,001 and £250,000 are taxed at a marginal rate
• Profits over £250,000 are taxed at 25%
This means a company making £100,000 profit will pay around £3,750 more in Corporation Tax than before the rate increase. However, this is still less than the 40% Income Tax paid by a higher-rate taxpayer in a partnership.
Changes for partnerships
Those operating a partnership are treated as self-employed for tax purposes and pay class 4 NICs at 6%.
The basis period reform now means all unincorporated businesses are taxed on a tax year basis. This change may have led to higher tax bills in January 2025 for those whose accounting year did not align with the tax year, due to transitional rules. Going forward, profits will be taxed based on the 6 April to 5 April tax year, regardless of accounting year-end.
Fiscal Drag
The 2025 Autumn Budget has frozen income tax and National Insurance thresholds for a further three years until April 2031, meaning partnerships will continue to face 'fiscal drag' as more profits are pulled into higher tax brackets without any threshold increases.
Tax Reliefs and Annual Investment Allowance
While a partnership can claim up to £1 million capital allowances via an Annual Investment Allowance (AIA) claim – and there are few farming businesses who spend more than this in the same accounting period – from 2026, companies will be able to claim 100% tax relief on an unlimited amount of expenditure for plant and machinery. It is also worth bearing in mind that this only applies to the purchase of new plant and machinery, whereas AIA can be claimed on the purchase of second-hand equipment.
The Budget has introduced a new first-year allowance of 40% from 1 January 2026 for main-rate assets not eligible for full expensing, such as second-hand plant and machinery. This allowance can also be claimed by unincorporated businesses, whereas they are unable to claim full expensing.
Meanwhile, from 1 April 2026 (for corporation tax) and 6 April 2026 (for income tax), the main rate of capital allowance writing down allowances will reduce from 18% to 14%.
Partnership or company?
The decision to incorporate or remain as a partnership is not a straightforward one. For farmers reinvesting profits and not needing to withdraw large sums, paying Corporation Tax at 25% may be preferable to paying Income Tax and National Insurance of 42%. However, partnerships offer greater flexibility in moving funds and assets, which can be advantageous in succession planning or restructuring.
When considering the most appropriate and tax-efficient way to structure your business, it is essential to base a decision on your personal and family circumstances, while taking into account factors such as personal liability and access to capital. There is certainly no one answer that applies to all farming businesses, and it may be beneficial to explore both structures.
To explore whether a partnership or company is the most suitable way to operate your farm business please contact our agricultural team on 08081445575 or email help@armstrongwatson.co.uk.
