More contractors and consultants are choosing to wind down gradually rather than stop immediately overnight.
We know it can seem appealing and working from one contract to the next lends itself to this approach.
Keeping your limited company open and compliant during that transition could prove to be one of the smartest decisions you make. The idea of working full time one day and stopping completely the next is losing its appeal.
Research by global advisory firm WTW found that nearly half of UK workers aged 50 and over have either started phasing into retirement or would like to, with most of those already doing so having reduced their hours.
Separate research from Aegon found that fewer than a third of over 50s now favour the traditional “cliff edge” approach.
The rising State Pension age is likely adding momentum to this movement as it rises from 66 to 67 between 2026 and 2028.
This means a longer wait for that income, however small it may seem and a greater need to bridge the gap.
Why consulting and contracting suits a gradual exit
Employees who want to wind down are often at the mercy of their employer’s appetite for part-time arrangements.
However, contractors are in a very different position, as you already set your own diary and negotiate your own rates.
A phased retirement might mean dropping from five days a week to two or three or moving to shorter assignments with much longer breaks between each one.
You may even change the roles you are looking at and move into more advisory work, where your knowledge can be put to better use.
It isn’t uncommon for some contractors or consultants to return to former clients on a reduced basis, providing continuity on projects they know inside out.
Whatever approach you choose to take, the main thing is you remain in control and can scale back or increase your workload to suit your finances.
The temptation to close the company
As work tails off, many contractors are tempted to tidy things up by closing their personal service company (PSC).
A members’ voluntary liquidation (MVL) can look like a neat way to extract retained profits and draw a line under things.
For someone who has genuinely finished working, that may be the right move, but for many others who simply intend to work less, closing too early can be costly in both financial and practical terms.
Here are some of the reasons why:
Always ready for the next opportunity – An established company with a trading history, business bank account, insurance cover and VAT registration already in place lets you accept work at short notice.
Agencies and end clients are generally comfortable engaging an existing company, whereas setting up again from scratch takes time you may not have when a good contract appears.
You avoid the two-year trap – Where an MVL qualifies for Business Asset Disposal Relief (BADR), capital gains on qualifying distributions are taxed at a reduced rate, subject to a lifetime limit of £1 million. That rate is now 18 per cent following the increase on 6 April 2026, having been 10 per cent before April 2025.
However, a targeted anti-avoidance rule allows HMRC to treat a distribution as income, taxed at dividend rates, if you carry on a similar trade or activity within two years of the winding up. That includes working as a sole trader or through a new company. For a contractor who is not yet certain they have stopped for good, this is a real risk and keeping the company open helps to avoid this issue.
You can draw profits more efficiently – Retained profits can be extracted over several tax years, timed to coincide with years when your other income is lower.
This matters more since dividend tax rates rose by two percentage points in April 2026, to 10.75 per cent for basic rate taxpayers and 35.75 per cent for higher rate taxpayers. Spreading withdrawals of retained profits, where possible, across a lower-earning period may keep more of that income within the basic rate band.
You keep an efficient route into your pension – Employer pension contributions made by your company are generally deductible for Corporation Tax, provided they meet the wholly and exclusively test and they are not treated as employment income for you.
The standard annual allowance is £60,000 for 2026/27 and unused allowance from the previous three tax years can often be carried forward.
Just be mindful that once you flexibly access a defined contribution pension, for example by taking taxable income through drawdown, the Money Purchase Annual Allowance applies.
Future contributions to money purchase schemes are then capped at £10,000 a year and carry forward is no longer available. For phased retirees, the order in which you draw on your pension and your company is worth planning carefully.
Staying compliant as a director
Keeping the company open means us here at Cogent continuing to meet your obligations as a director, even in quieter years. Your responsibilities do not shrink in line with your turnover and we will still need to deal with the following on your behalf:
- Annual accounts filed with Companies House
- A confirmation statement at least once every 12 months
- A company tax return and any corporation tax due
- Your personal Self-Assessment return
- Payroll and VAT returns where these apply
