How to Handle Limited Company Tax—So You Keep More of What You Earn

Here’s the hard truth: For UK limited company owners, it’s not the competition or the economy that keeps you up at night—it’s the taxman’s knack for turning simple profit into a paperwork maze. Get it right, and you keep more of what you earn. Get it wrong, and your “successful year” can vanish into a fog of corporation tax, national insurance, and HMRC love letters.

The difference between a healthy bottom line and an unexpected tax bill? Understanding how limited company tax really works—and making sure every pound that should stay in your business, does.

Ready? Let’s get into the numbers that matter.

Limited company tax: What it is and how it works

A limited company is a distinct legal entity. That means your business—not you personally—pays tax on its profits, and your own finances and liability are (mostly) protected.

How are limited companies taxed?

Compared to self-employed individuals or sole traders, limited companies have a different tax structure and a few extra steps to manage:

• Corporation tax: Companies pay corporation tax on their taxable profits. For most, this means 25%, though some small businesses qualify for the lower “small profits rate” (19%).
• VAT (Value Added Tax): If your turnover exceeds the VAT threshold (£90,000 in 2024/25), you must register for VAT and submit regular VAT returns.
• Tax-efficient pay: Directors and company owners can pay themselves a mix of salary (which reduces taxable company profits) and dividends (which can be tax-free up to an allowance, and usually taxed at lower rates).

Your Role as Director

Here’s what really sets a limited company apart: If things go wrong, your personal assets are usually protected—the company, not you, is liable for its debts and obligations.

With these benefits, however, come responsibilities:

• You’re on the hook for filing accurate annual accounts, corporation tax returns, and (if registered) VAT returns.
• Miss deadlines, and HMRC will find you—sometimes faster than you think.

Corporation tax: Understanding the main rate, small profits rate, and marginal relief

Corporation tax is the big one for limited companies—the tax HMRC charges on your company’s taxable profits each year. But the rate you pay isn’t always straightforward, and the difference between “main rate” and “small profits rate” can have a real impact on your bottom line.

The main rate vs. small profits rate

• Main rate: For the 2024/25 tax year, most companies pay corporation tax at 25%.
• Small profits rate: If your business profits are £50,000 or less, you qualify for the lower small profits rate of 19%.
• Marginal relief: If your profits fall between £50,001 and £250,000, you’ll pay a blended rate using marginal relief.

What is marginal relief?

Marginal relief is a tapered system designed to stop your tax bill from jumping sharply the moment your profits cross the small profits threshold. In effect, you pay a rate between 19% and 25% on profits from £50,001 to £250,000. It’s calculated with a formula, but you can use HMRC’s tax calculator or accounting software to crunch the numbers—no spreadsheet headaches required.

Calculating your corporation tax bill

To figure out how much you owe:

• Start with your company’s trading and investment profits (not your personal income).
• Deduct allowable expenses (like staff costs, pension contributions, professional fees, and office expenses).
• What’s left is your taxable profit—and that’s what corporation tax is charged on.

Remember: only the company’s profits are taxed, and the company (not you, the director or shareholder) is responsible for paying the bill. Your personal liability is (mostly) protected—provided you meet all your director duties and file everything on time.

Want to make sure you’re not overpaying—or missing a smart opportunity to save? Book a free no-obligation financial review with a tax adviser through Unbiased. They’ll help you optimise your setup, flag any red flags, and ensure you’re keeping as much of your hard-earned income as possible.

Accounting periods, tax year, and financial year: Key dates you can’t ignore

Limited companies run on their own calendar—and knowing the difference between key dates is the foundation of tax compliance (and fewer sleepless nights).

What’s the difference?

• Accounting period: This is the span your company’s corporation tax is calculated for—normally 12 months, matching your financial year.
• Financial year: The period your company’s annual accounts cover, set when you register with Companies House. You can choose your year-end date, but once set, it stays fixed unless you apply to change it.
• Tax year: This runs from 6 April to 5 April, but mainly applies to personal tax (not corporation tax).

Why your year-end matters

Setting your company’s year-end (and therefore your accounting period) affects when:

• Your company tax return is due (12 months after your accounting period ends)
• Your corporation tax bill must be paid (9 months and 1 day after the period ends)
• Annual accounts must be filed with Companies House (usually within 9 months of your year-end)

A well-chosen year-end can help you plan cash flow, align income and expenses, or take advantage of changes in the rate of corporation tax.

📌 Pro Tip: Missing these deadlines can mean automatic penalties, interest, and a sharp reminder from HMRC—so set reminders and get your paperwork in order early.

How to pay yourself as a company director

Paying yourself as a company director isn’t just about moving money from the company bank account to your own. The structure you choose can make a huge difference to both your personal and company tax bills.

Salary, dividends, or both?

You have two main options—and most directors use a blend:

• Salary: Paid via PAYE, just like an employee. This is a business expense, so it reduces the company’s taxable profits (and corporation tax bill).
• Dividends: Paid from company profits after corporation tax. Dividends aren’t a business expense, but they’re taxed at lower rates than salary (and are tax-free up to the dividend allowance—£500 in 2024/25).

How to use your allowances and thresholds

• Personal allowance: You can earn up to £12,570 (2024/25) before paying income tax—so a salary at or just below this can be a tax-efficient move.
• National Insurance: Keep your salary above the lower earnings limit (£6,396) to qualify for state benefits, but below the primary threshold (£12,570) to avoid paying National Insurance contributions yourself (the company will still pay a small amount).
• Higher rate tax: Keep total income under the higher-rate threshold (£50,270) to avoid 40% income tax on dividends and salary combined.

PAYE and dividend strategies

• Salary is paid via PAYE (Pay As You Earn), and you’ll report it through HMRC’s systems just like any employee.
• Dividends are declared by the company, voted by directors, and distributed to shareholders—often you, but possibly others.

Personal tax vs. company tax

• Salary reduces the company’s profits (lowering corporation tax), but you pay income tax and National Insurance on it.
• Dividends are paid from profits after corporation tax, but taxed at a lower rate (with a small tax-free allowance).
• Smart directors blend the two for the best overall outcome: enough salary to use your personal allowance and qualify for benefits, with the rest as dividends for tax efficiency.

📌 Pro Tip: Always keep clear records and minute any dividend payments in board meetings—HMRC likes documentation, and so should you.

Dividend tax explained (and how it impacts your personal bill)

Dividends can be a highly tax-efficient way for directors and shareholders to pay themselves, but the rules are stricter than many realise. Let’s break down exactly how dividend tax is calculated, and how it fits in with your other tax allowances.

How dividend tax is calculated

The government sets a specific allowance for dividend income, after which tax applies at different rates based on your overall income. Here’s what to expect for 2024/25:

• Dividend allowance: The first £500 you receive in dividends each tax year is tax-free.
• After that, dividend income is taxed in bands:
  • Basic rate (total income up to £50,270): 8.75%
  • Higher rate (up to £125,140): 33.75%
  • Additional rate (over £125,140): 39.35%

How dividends and corporation tax work together

Don’t forget: your company pays corporation tax before any dividends are distributed. This means:

• Dividends come from post-tax profits: Your company pays corporation tax (currently 19% or 25% depending on profit level), and you can only distribute what’s left.
• You pay dividend tax personally: Unlike salary, dividends are not a business expense and don’t reduce your corporation tax bill.

How your allowances work

Dividends interact with your personal tax-free allowance and the dividend allowance. This means:

• Personal allowance: The first £12,570 of your total income (salary plus dividends) is tax-free, as long as you stay below the threshold.
• Dividend allowance: You then get the next £500 in dividends tax-free.
• After those allowances: The combined total of your salary and dividends decides whether your remaining dividend income is taxed at the basic, higher, or additional rate.

Example: Let’s say you pay yourself a salary of £12,570 and take £40,000 in dividends. Your salary uses up your personal allowance, so all your dividends are taxable except for the first £500 (the dividend allowance for 2025/26). You’ll pay 8.75% on the next £37,700 of dividends (the basic rate band), and the remaining £1,300 of dividends will be taxed at the higher rate of 33.75%.

📌 Pro Tip: Dividends are taxed based on the date they’re declared (not paid), so timing your dividend declaration before or after the tax year ends can make a real difference to your total tax bill—especially if you’re close to a threshold.

National Insurance Contributions (NICs) for companies and directors

National Insurance isn’t just a tax you pay for the privilege of working in the UK—it’s a key piece of the puzzle for directors, employees, and the self-employed alike. Here’s how the rules differ depending on your role, and what you need to watch for as a limited company director.

How National Insurance applies to different roles

The way you pay NICs depends on how you earn your income:

• If you’re self-employed: You pay Class 2 and Class 4 NICs, based on your profits. This is all handled through your annual Self Assessment tax return.
• If you’re a company director: You pay Class 1 NICs—like an employee—but you can spread your contributions over the tax year, which helps smooth out cash flow if your pay varies.
• If you’re an employee: Class 1 NICs are deducted from your pay via PAYE and paid to HMRC along with your employer’s contributions.

When do NICs kick in?

You only pay NICs when your salary or profits cross certain thresholds. For 2024/25:

• Directors and employees: NICs start when annual earnings exceed the primary threshold (£12,570).
• Self-employed: Class 2 NICs kick in above £6,725 in profits. Class 4 NICs start once profits are over £12,570.

How and when to pay

Here’s how the money actually leaves your bank account:

• Directors and employees: NICs are paid monthly or quarterly to HMRC as part of the PAYE process—straight from your company’s business bank account.
• Self-employed: Your NICs are bundled into your annual Self Assessment tax bill, with HMRC telling you exactly what to pay and when.

📌 Pro Tip: If you pay yourself a salary just above the lower earnings limit (£6,396 for 2024/25), you’ll keep your state pension record up to date without paying any actual NICs—a rare tax efficiency win that pays off later.

VAT for limited companies: When (and why) to register

VAT—Value Added Tax—is a milestone for growing companies, and the rules for registration are strict. Here’s when you need to sign up, and what it means for your business and your tax obligations.

When must a company register for VAT?

You can’t avoid VAT forever—once your taxable turnover crosses a certain threshold, HMRC expects you to play ball. For the 2024/25 tax year:

You must register for VAT if:

• Your company’s VAT-taxable turnover exceeds £90,000 in any rolling 12-month period.
• You expect to go over the threshold in the next 30 days alone.

Fail to register on time, and you could face penalties and extra paperwork from HMRC.

VAT schemes and how they affect tax payments

There’s more than one way to manage VAT—and the right scheme can make life easier (or harder).

• Standard scheme: Pay and reclaim VAT based on the invoices you issue and receive.
• Flat rate scheme: Pay a fixed percentage of your VAT-inclusive turnover—sometimes simpler for small businesses.
• Cash accounting scheme: Only pay VAT to HMRC when you actually receive payment from customers.

The right scheme can impact your admin workload, your cash flow, and your overall tax liability. For detailed guidance, calculators, and up-to-date thresholds, check the VAT section on gov.uk—it’s the go-to resource for business owners.

📌 Pro Tip: You don’t have to wait until you hit the threshold—voluntary registration can let you reclaim VAT on your business expenses, and can sometimes make your company look more established to clients.

Capital allowances and other ways to get tax relief

When you invest in your business—whether it’s a laptop, machinery, or a company van—you may be able to claim capital allowances and other forms of tax relief. These can make a real difference to your company’s bottom line.

What are capital allowances?

Capital allowances let you deduct the cost of qualifying business assets from your profits before tax, reducing your corporation tax bill. Here’s how they work:

• Eligible assets include: computers, office equipment, vehicles, tools, and certain fixtures or integral features in your premises.
• Annual Investment Allowance (AIA): Most companies can claim 100% of qualifying expenditure up to £1 million per year, making it the fastest way to get relief.
• Writing Down Allowance: For costs above the AIA limit or certain assets (like cars), you claim relief over several years at a set percentage.
• First Year Allowance: Some energy-saving equipment qualifies for 100% relief, even if you’ve reached your AIA cap.

Selling company assets and capital gains tax

When you sell a company asset (such as a vehicle or equipment) for more than its written-down value, you may trigger a capital gain. For companies, this profit is taxed as part of your overall taxable profits—not under personal capital gains tax rules, but it’s still important to account for.

Other tax relief options and tax credits

Don’t leave money on the table—explore other reliefs available to limited companies:

• R&D tax credits: If you innovate or develop new products, you may be able to claim enhanced relief on qualifying research and development costs.
• Patent box: A lower corporation tax rate for profits earned from patented inventions.
• Super-deduction (ending March 2025): Invest in qualifying plant and machinery and deduct up to 130% of the cost.
• Small business rates relief: If you occupy a single property and its rateable value is below the threshold, you may pay less (or even zero) in business rates.

📌 Pro Tip: Always keep detailed records and receipts for every asset and expense—HMRC can (and sometimes will) ask for proof, especially if you’re VAT-registered or making large claims.

Expenses you can claim (and the ones you can’t)

One of the real perks of running a limited company? Claiming a wide range of business expenses to reduce your taxable profits. But the rules can get fiddly—so here’s what you can and can’t put through the books.

What counts as allowable business expenses?

To qualify, an expense must be “wholly and exclusively” for business use. Common examples include:

• Office and workspace costs: Rent, utilities, and even a portion of home office expenses if you work from home.
• Staff costs: Employee and director salaries, bonuses, National Insurance contributions, and even employer pension contributions.
• Professional fees: Accountant and solicitor fees, consultancy costs, and specialist business advice.
• Travel and subsistence: Business travel (trains, mileage, taxis, hotels, meals on the road), but not the commute to a regular workplace.
• Equipment and technology: Computers, software, business phones, office furniture, and repairs or replacements.
• Marketing and subscriptions: Advertising, website costs, networking events, professional association memberships, and relevant magazine or online subscriptions.
• Insurance: Professional indemnity insurance, employer’s liability, public liability, and business equipment insurance.
• Training: Courses and conferences relevant to your business activities.
• Bank charges and interest: Fees on your business bank account or business loans.

Expenses you can’t claim

Some costs may feel business-related, but HMRC says otherwise. Typical no-gos include:

• Personal expenses (lunches, clothing not branded or protective, home phone bills)
• Client entertainment (except staff events like a Christmas party—up to £150 per head per year)
• Fines or penalties (like parking tickets)
• Commuting costs (from home to your regular workplace)

How to maximise deductions and stay compliant

• Keep every receipt: HMRC loves proof, and a digital filing system can save you time at year-end.
• Use a separate business bank account: This keeps your records clean and makes preparing company accounts far less painful.
• Log expenses regularly: Don’t let them pile up—make it a habit to update your records each week or month.

📌 Pro Tip: If you work from home, you can claim a proportion of your household bills—but the method (flat rate vs. actual costs) depends on your circumstances. A little homework can mean bigger savings.

Reporting, filing, and HMRC deadlines

Keeping up with the paperwork is as crucial as paying your tax bill. Miss a deadline, and the penalties (and paperwork) start stacking up fast.

Your main filing duties (and when they’re due)

• Company Tax Return (CT600): Must be filed with HMRC within 12 months of your company’s accounting period end date. This shows your taxable profits and the corporation tax you owe.
• Company accounts: Need to be filed with Companies House within 9 months of your company’s financial year end. This creates a public record of your business’s financial position.
• Self Assessment tax return: Required if you’re a company director, especially if you’ve received dividends, a salary, or other untaxed income. The online deadline is 31 January after the end of the tax year.

Why Companies House gets involved

Even if you’ve paid all your taxes to HMRC, you must still file annual accounts with Companies House. Fail to do this and your company could be struck off the register—meaning your business officially ceases to exist.

What if you miss a deadline?

• Late filing penalties: Start at £100 and increase the longer you wait.
• Interest on late payments: HMRC charges interest daily on overdue corporation tax.
• Serious consequences: Persistent failures can result in prosecution or your company being shut down by Companies House.

📌 Pro Tip: Automate your reminders—set up calendar alerts for every major filing date, and schedule prep time well in advance. Rushing is when costly mistakes happen.

Tax tips: Keep more of what you earn

If you want to keep more profit in your pocket (and less in HMRC’s), smart tax management is key. Here’s how savvy business owners make it work—without crossing any lines.

1. Lower your corporation tax bill: Claim every allowable business expense—think equipment, travel (not commuting), staff costs, professional fees, and pension contributions. These reduce your taxable profits, so the less profit you report, the less tax you pay.
2. Max out capital allowances and reliefs: Investing in new kit, software, or energy-saving equipment? Check which capital allowances or first-year reliefs apply. And don’t forget R&D tax credits if you innovate.
3. Structure your accounting period for efficiency: Align your financial year with seasonal cash flow or planned business spending. A well-chosen year-end can spread profits (and tax bills) to your advantage.
4. Don’t DIY if the stakes are high: When your business gets complicated—or your numbers start getting big—bring in a specialist accountant. They’ll spot reliefs and deductions you might miss, and keep you on the right side of every rule.

📌 Pro Tip: HMRC loves good records. The more organised you are (separate bank account, cloud bookkeeping, digital receipts), the easier it is to claim every penny and prove you’re playing by the book.

Stay one step ahead of the taxman

When it comes to limited company tax, the winners aren’t just the ones with the biggest profits—they’re the ones who know how to keep more of them. Take full advantage of every relief, run your numbers like a pro, and never lose sight of those key dates.

Want to be sure you’re not leaving money on the table? Book a free financial review with a tax adviser through Unbiased and find out how to maximise your take-home pay—all without adding “tax expert” to your job title.

Frequently Asked Questions