Law firm profit extraction is the question of how the people who own the firm take money out of it, and how that money is taxed on the way. The right answer is driven almost entirely by your structure. A sole practitioner, a general partnership and an LLP are tax-transparent, so the owners take drawings and are taxed personally on their profit share. An incorporated firm (a company or an Alternative Business Structure) pays corporation tax and its owners extract by salary and dividends.
This guide sets out each route, the tax that applies, the comparison between the partnership and the company model, and the capital gains tax and Business Asset Disposal Relief position when the practice is eventually sold. Figures are tagged with their tax year because several rates change across 2025/26 and 2026/27.
Drawings and profit share: how partners and LLP members are taxed
In a general partnership or an LLP there is no salary and no dividend for the owners. Each partner or member is allocated a share of the firm's profit under the profit-sharing arrangement, and that allocated share is what gets taxed. Drawings are simply cash advances against the share during the year.
The single most important point, and the most common cash-flow trap, is that you are taxed on your allocated profit share, not on your drawings. A member who draws less than their allocation still pays tax on the full allocation. The undrawn balance stays in the firm as working capital, but it has already been taxed in the member's hands. The firm itself pays no corporation tax on its trading profit because it is tax-transparent.
A self-employed partner or member pays:
- Income tax on the profit share at the 2025/26 rates: a personal allowance of £12,570 (tapered above £100,000 and lost at £125,140), basic rate 20% to £50,270, higher rate 40% to £125,140, then additional rate 45%.
- Class 4 National Insurance at 6% on profits between £12,570 and £50,270, then 2% above £50,270 (2025/26).
Class 2 National Insurance is no longer charged from 6 April 2024. A partner with profits at or above the Small Profits Threshold is treated as having paid and keeps their state-pension entitlement, with voluntary Class 2 available to those below it. Tax is collected through self-assessment, with payments on account due on 31 January and 31 July.
Because profits are taxed when they arise, the timing levers for a partnership are limited. For a fuller treatment of allocation and the salaried-member rules, see our guide on how LLP members are taxed.
Salary and dividends: extracting from an incorporated firm
An incorporated firm pays corporation tax on its profit before anything reaches the owners: 19% on profits up to £50,000, 25% on profits above £250,000, with marginal relief tapering between the two. The owner-directors then extract the post-tax profit through a combination of salary and dividends.
Salary is deductible for the company and brings income tax and employee National Insurance into charge on the director. The company also pays employer (secondary Class 1) National Insurance at 15% on salary above the £5,000 secondary threshold from 6 April 2025. A common pattern is to take a modest salary and extract the balance as dividends, though the right salary level depends on the director's wider National Insurance and pension position.
Dividends are paid from post-tax profit and carry no National Insurance, but they are charged to dividend tax above a £500 dividend allowance. The rates have moved, so each must be tagged with its tax year:
- 2025/26: ordinary rate 8.75%, upper rate 33.75%, additional rate 39.35%.
- From 6 April 2026 (Finance Act 2026, section 4): ordinary rate 10.75%, upper rate 35.75%, additional rate 39.35% (unchanged). The £500 allowance is retained.
The 2026/27 increase to the ordinary and upper rates raises the tax cost of dividend extraction and narrows the historic advantage of the company route. Whether incorporation still saves tax at a given profit level is now a closer calculation than it was, and it has to be weighed against the loss of tax transparency and the director's own pension and National Insurance position. Our analysis of whether a law firm should incorporate after the 2026 dividend rise works through that comparison.
Partnership versus company: the comparison that matters
The headline question for most firm owners is whether the partnership/LLP model or the incorporated model leaves more in their pocket. The honest position is that there is no flat winner at typical partner profit levels, and the 2026/27 dividend increase has tightened the gap.
- Partnership or LLP. One layer of tax, charged personally on the profit share at income tax rates plus Class 4 National Insurance. Simple, transparent, taxed on an arising basis whether or not the cash is drawn. There is no dividend route here at all, because there are no shares.
- Company or ABS. Corporation tax on profit, then dividend tax on extraction. More timing flexibility (dividends can be declared across tax years) and limited liability, but two layers of tax, more compliance, and a dividend cost that rose for 2026/27.
A frequent and costly mistake is to treat a partner's profit share as if it were a dividend. It is not: dividends apply only to the shareholders of an incorporated firm. A partner or LLP member is always taxed on their share as self-employment income. Modelling the two structures side by side, on the firm's actual profit and the owners' actual extraction needs, is the only reliable way to choose.
Pension contributions as an extraction route
Pension contributions are an efficient way to extract value for both structures. For a partner or LLP member, personal contributions attract income tax relief at the member's marginal rate. For an incorporated firm, an employer pension contribution is generally deductible for corporation tax and is not a benefit in kind on the director, which often makes it more efficient than taking the same amount as additional salary or dividend.
Relief is subject to the annual allowance and its taper for high earners, and to the carry-forward of unused allowance from earlier years. We cover the detail in our guide to partnership pension contributions and tax relief.
Capital extraction: CGT and Business Asset Disposal Relief on sale
Profit extraction is not only about the annual income routes. The largest single extraction many owners ever make is the eventual sale of the practice, and that is taxed as capital, not income, which is usually more favourable.
A partnership or LLP has no shares, so its sale is an asset sale: the buyer acquires goodwill, work in progress, debtors and fixed assets, and each member's capital account is settled. Only an incorporated firm can do a share sale. Goodwill is a capital asset taxed under capital gains tax, while work in progress and debtors are trading income taxed at income tax rates plus Class 4 National Insurance, so the sale agreement must split the two cleanly.
For individuals, the standard capital gains tax rates are 18% on gains within the basic-rate band and 24% on gains above it, applying to all chargeable assets (including goodwill) from 30 October 2024. The annual exempt amount is £3,000 for 2025/26 and 2026/27. These replaced the former 10% and 20% rates, which no longer apply.
Business Asset Disposal Relief (BADR) reduces the rate on qualifying gains up to a £1 million lifetime limit per individual. The rate is on a date band:
- 10% for disposals up to 5 April 2025.
- 14% for disposals between 6 April 2025 and 5 April 2026.
- 18% for disposals from 6 April 2026.
BADR requires the qualifying conditions to be held throughout the two-year period to disposal, and for a share sale it needs at least 5% of ordinary share capital and voting rights plus officer or employee status. Gains above the £1 million lifetime limit, or any gain that does not qualify, are taxed at the standard 18% or 24%. The step from 14% to 18% on 6 April 2026 makes the timing of a late-2025/26 completion a genuine planning point. For the full sale mechanics, see our guides on asset sale versus share sale and the tax treatment of goodwill on a law firm sale.
Timing and forecasting
The timing of extraction affects the tax bill differently for each structure. Partners and LLP members are taxed on an arising basis, so there is little scope to defer the charge on a profit share once it has arisen. Incorporated firms have more room: directors control when dividends are declared, which allows extraction to be spread across tax years to use allowances and lower bands, or timed around a known rate change such as the 2026/27 dividend increase.
Making Tax Digital for Income Tax phases in from April 2026 for unincorporated businesses above the relevant income threshold, bringing quarterly updates that will tighten the discipline around forecasting and record-keeping for partnerships and LLPs. Annual profit forecasting remains the foundation of any sensible extraction plan: it lets you size drawings, salary and dividends against the tax that will actually fall due, and it flags whether deferring extraction to ease a tax bill would create a working-capital problem at a busy point in the year.
Compliance and regulatory context
Every extraction strategy has to sit inside the firm's regulatory obligations. The SRA Accounts Rules require client money to be kept entirely separate from the firm's own money in a designated client account, and they prohibit using a client account to provide banking facilities. The rules do not govern profit extraction directly, but they set the boundary: extraction can only ever come from the firm's own money, never from client funds, and the firm must keep enough working capital to meet its regulatory and professional-indemnity obligations.
HMRC also expects extraction arrangements to have a genuine commercial rationale rather than being constructed purely to save tax. A clean structure, properly documented and consistent with how the firm actually operates, is far more robust than an aggressive one. Where the numbers are finely balanced, modelling the options on the firm's real figures, with specialist advice, is the way to land on the right route.