If you run a limited company, the question that actually matters is how much you keep. This guide to limited company tax sets out the rates and thresholds, walks through a worked example using real numbers, and breaks down the salary-versus-dividends calculation that decides your take-home. You’ll come away knowing which taxes apply, how they are worked out, and how a typical salary and dividend split stacks up.
What Tax Does a Limited Company Pay?
HMRC charges Corporation Tax on your company’s profits, not its turnover.
If you take a director’s salary, it goes through PAYE the same way any employee’s pay does. The company may also owe employer NICs on salary above the secondary threshold, even if you’re the only person on the payroll.
Dividends are taxed separately. You declare and pay Dividend Tax through Self Assessment, usually at lower rates than salary. That is why most limited company directors structure pay as a combination of salary and dividends.
VAT
VAT registration becomes compulsory once your taxable turnover reaches £90,000 in any rolling 12-month period. Once registered, Making Tax Digital rules require digital records and VAT returns submitted through compatible software.
You can also reclaim VAT on business purchases. In a quarter where you invoice £30,000 plus £6,000 VAT and spend £5,000 plus £1,000 VAT, the net VAT payment is £5,000.
Corporation Tax Rates
Since 1 April 2023, two rates have applied. The small profits rate is 19% on taxable profits up to £50,000. The main rate is 25% on profits above £250,000. Between those thresholds, Marginal Small Companies Relief produces a blended effective rate. A company with profits of exactly £100,000 pays roughly 22.8%.
Associated companies: if you control more than one company, the profit thresholds are divided between them. Two associated companies each get thresholds of £25,000 and £125,000 instead of the full amounts.
The Corporation Tax financial year runs April to April. If your accounting year crosses two financial years, profits are apportioned between the two periods. A company with a 31 December 2025 year end, for example, apportions three months from January to March to one financial year and nine months from April to December to the next.
For most companies, Corporation Tax is due nine months and one day after the accounting period ends. Companies with profits above £1.5 million pay in quarterly instalments. The CT600, the Corporation Tax return, must be filed within 12 months.
How Much Can a Limited Company Earn Before Paying Tax?
Corporation Tax applies from the first pound of profit. There is no tax-free allowance for limited companies.
A director’s salary is a deductible expense, which reduces profit before Corporation Tax is calculated. Allowable business expenses do the same, including office costs, travel, software and accountancy fees, provided they are wholly and exclusively for the business.
Capital Allowances can let you deduct the full cost of qualifying plant and machinery in year one. The Annual Investment Allowance currently covers up to £1 million per year. Above that, full expensing gives 100% first-year relief on qualifying new plant and machinery.
Employer pension contributions are fully deductible against Corporation Tax. The annual allowance for 2025-26 is £60,000. A £40,000 employer pension contribution reduces your Corporation Tax bill by £7,600 at 19%. Taking the same £40,000 as dividends would cost £9,383 in Corporation Tax on the underlying profit, plus up to £3,456 in Dividend Tax at 8.75%, a combined cost of £12,839. The pension route saves more than £5,200 on that example. Which is worth knowing before you decide how to move money out of the company.
Retained profits can also create a timing advantage. £10,000 left in the company and earning 5% a year grows to £11,576 after three years. Take the same £10,000 out immediately and around £875 goes to Dividend Tax first at 8.75%, leaving £9,125 to invest. After three years at 5%, that grows to £10,563. The deferral advantage is more than £1,000.
Dividend Tax Allowance and Rates for Limited Company Directors
The dividend allowance has fallen from £2,000 in 2022-23, to £1,000 in 2023-24, and then to £500 from 2024-25 onward. That £500 applies across all dividend income from all sources.
The rates for 2025-26 are:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Dividend income sits on top of your other income when deciding which band applies.
| Salary £6,500 | Salary £12,570 | |
|---|---|---|
| Personal allowance used | £6,500 | £12,570 |
| Remaining basic-rate band, up to £50,270 | £43,770 | £37,700 |
| Dividends taxed at 8.75%, basic rate | First £43,770 | First £37,700 |
| Dividends taxed at 33.75%, higher rate | Above £43,770 | Above £37,700 |
A £12,570 salary uses the full personal allowance, but it also narrows the basic-rate band available for dividends by £6,070 compared with a £6,500 salary. That means more dividend income hits the 33.75% higher-rate band sooner.
Dividends can only be paid from distributable profits, meaning profits left after Corporation Tax. Paying a dividend without enough retained profit is unlawful under the Companies Act 2006.
Dividend administration: issue a dividend voucher and minute the declaration at a board meeting. Dividend Tax is reported and paid through Self Assessment. PAYE does not collect it.
Salary vs Dividends: Which Is More Tax-Efficient?
For 2025-26, setting your director’s salary at £5,000, the secondary NIC threshold, means the company pays no employer NICs. But £5,000 is below the Lower Earnings Limit of £6,500, so it does not build a qualifying year for State Pension. Many directors choose £6,500 to keep State Pension credits while keeping employer NICs low.
Some directors prefer £12,570 to use the full personal allowance. No employee NICs are due below that figure, but employer NICs at 15% apply on everything above £5,000. The extra cost is 15% × (£12,570 − £5,000), which is roughly £1,136. That £12,570 salary is fully deductible against Corporation Tax, saving £2,388 at 19%. The right answer depends on your Corporation Tax rate and personal position. Worth modelling before you decide.
Above salary, most directors take dividends. For a basic-rate taxpayer, dividends above the £500 allowance are taxed at 8.75%, compared with 20% Income Tax plus 8% employee NICs on equivalent salary. Dividends also carry no NIC liability for the company or the individual.
The trade-off is straightforward. Salary reduces the company’s Corporation Tax bill because it is deductible. Dividends are paid from post-tax profit and are not.
If your spouse or partner holds shares with a genuine economic interest, dividends paid to them can use their own personal allowance and basic-rate band. HMRC’s settlements legislation can apply if the arrangement lacks commercial substance, so this is not a paper exercise.
Limited Company Tax: Worked Example
A simplified example for a single-director company in 2025-26.
| Line item | Amount |
|---|---|
| Revenue | £80,000 |
| Allowable expenses | £20,000 |
| Gross profit | £60,000 |
| Director’s salary, deductible | £6,500 |
| Taxable profit | £53,500 |
£53,500 sits just above the £50,000 small profits threshold, so Marginal Small Companies Relief applies. The Corporation Tax bill works out at approximately £10,428 after marginal relief.
Post-tax profit available for dividends: £53,500 minus £10,428, leaving £43,072.
Director’s personal tax
- Salary: £6,500 is below the £12,570 personal allowance, so no Income Tax. It is also below the primary NIC threshold, so no employee NICs.
- Dividends: the first £500 is tax-free. The remaining £42,572 is taxed at 8.75%, giving Dividend Tax of £3,725.
- Total personal tax: £3,725 through Self Assessment.
Combined Corporation Tax and personal tax on £80,000 revenue comes to roughly £14,153. Against the £60,000 profit, the effective rate is about 23.6%.
Is It Worth Being a Limited Company? Tax Pros and Cons
Advantages
Tax savings typically increase as profits rise.
| Sole trader tax, approx. | Limited company tax, approx. | Annual saving | |
|---|---|---|---|
| £50,000 profit | £12,200 | £8,600 | ~£3,600 |
| £80,000 profit | £23,700 | £18,200 | ~£5,500 |
The sole trader figures include Income Tax and Class 2/4 NICs. The limited company figures include Corporation Tax, employer NICs, and personal Dividend Tax using a £6,500 salary.
Limited liability separates your personal assets from business debts.
Retained profits can grow tax-deferred inside the company, useful if you plan to reinvest or sell.
Disadvantages
Admin is heavier. A company needs accounts, a CT600, PAYE, and your own Self Assessment return. A sole trader does not carry the same filing burden.
Corporation Tax is due nine months and one day after the accounting period ends. The CT600 must be filed within 12 months.
IR35 risk is real. Off-Payroll Working rules can remove the tax advantage entirely if HMRC treats you as a disguised employee. The key tests are whether the client controls how and when you work, whether you can send a substitute, and whether there is mutual obligation to offer and accept work. If you are found inside IR35, income is taxed as employment income, with Income Tax plus full NICs. That can wipe out the salary-plus-dividends benefit entirely. For contractors, this is not a footnote.
Need Help With Your Limited Company Tax?
Understanding which taxes apply, and how to structure salary and dividends, can make a real difference to what you take home. Reed & Co. works with limited companies and self-employed people across Bristol, Bath, Gloucester and the wider South West. Give us a call or send a message and we’ll look at the numbers with you.
