The Complete UK Limited Company Tax Guide 2025/26

Corporation Tax is the tax your limited company pays on its taxable profits. Unlike income tax (which you pay personally), Corporation Tax is levied on the company itself. This is one of the key advantages of operating through a limited company: you only pay personal tax on the money you actually extract.

2025/26 Rates

The Corporation Tax rates for financial years starting from 1 April 2023 onwards are:

How Marginal Relief Works

Marginal relief prevents a cliff-edge where earning one pound more than 50,000 would suddenly push your entire profit to 25%. Instead, the effective rate increases gradually. The formula HMRC uses is:

Marginal relief = (Upper limit - Profits) x Profits / Profits x 3/200

In practice, the effective rate in the marginal band is approximately 26.5% on the profits between 50,000 and 250,000. This means earning an extra pound in this range actually costs you 26.5p in tax, not 25p. Understanding this is important for year-end planning, because it can sometimes be worth accelerating expenses or deferring income to stay below the 50,000 threshold.

Associated companies: If you (or your associates) control more than one company, the 50,000 and 250,000 thresholds are divided equally between all associated companies. Two associated companies means the small profits threshold drops to 25,000 each.

Payment Deadlines

Corporation Tax must be paid 9 months and 1 day after the end of your accounting period. If your year end is 31 March, payment is due by 1 January of the following year. The Company Tax Return (CT600) must be filed within 12 months of the period end.

Late payment triggers automatic interest from the day after the deadline. Late filing of your CT600 incurs a 100 penalty immediately, rising to 200 after three months, with additional daily penalties possible after six months. Read our detailed breakdown in Corporation Tax deadline guide.

Filing the CT600

The CT600 is your company's annual tax return submitted to HMRC. It must include your full company accounts (iXBRL tagged), a tax computation, and supporting schedules. Most companies file electronically through HMRC's online services or commercial software.

For a walkthrough of the filing process, see our guide to the CT600 return. You can also estimate your bill using our Corporation Tax calculator.

Reducing Your Corporation Tax Bill

The most effective ways to reduce Corporation Tax legally are:

• Claim all allowable expenses (see the expenses section below)
• Make employer pension contributions (see pension contributions)
• Claim capital allowances on equipment, vehicles, and machinery, including the Annual Investment Allowance (AIA) of up to 1,000,000
• R&D Tax Relief if your company undertakes qualifying research and development activities
• Timing of income and expenses around your year end to manage which tax period they fall into

How you extract money from your limited company is arguably the single most important tax decision you make each year. The two primary methods are salary (paid via PAYE) and dividends (paid from post-tax profits). Each is taxed differently, and the optimal split depends on your company's profit level, your personal circumstances, and whether you have other income.

How Salary is Taxed

Salary is subject to income tax (via PAYE) and National Insurance Contributions (NICs). As a director, you pay both employee NICs and the company pays employer NICs on your behalf. However, salary is a tax-deductible business expense, which reduces your company's Corporation Tax bill.

The key rates for 2025/26:

• Employee NI: 8% on earnings between 12,570 and 50,270, then 2% above that
• Employer NI: 15% on earnings above 5,000 (this threshold dropped from 9,100 in April 2025)
• Income Tax: 20% basic rate (12,571 - 50,270), 40% higher rate (50,271 - 125,140), 45% additional rate (over 125,140)

How Dividends are Taxed

Dividends are not subject to National Insurance at all. They are taxed at special, lower rates. However, dividends are paid from profits that have already been subject to Corporation Tax, so there is an element of double taxation.

Dividend tax rates for 2025/26:

• Dividend allowance: First 500 of dividends are tax-free
• Basic rate: 8.75% (on dividends within the basic rate band)
• Higher rate: 33.75% (on dividends within the higher rate band)
• Additional rate: 39.35% (on dividends above 125,140)

The Optimal Strategy for 2025/26

For most single-director companies with no other employees, the tax-optimal approach is:

1. Pay yourself a salary of 12,570 per year (1,047.50 per month). This uses your full personal allowance so you pay zero income tax on your salary. You will pay employer NI of approximately 1,135 on the portion above 5,000, but this is deductible as a business expense.
2. Take remaining profits as dividends. After paying Corporation Tax on the remaining profit, distribute the rest as dividends. The first 500 is tax-free, and the rest is taxed at just 8.75% (basic rate), significantly lower than the 20% income tax you would pay on additional salary.

Worked Example

Suppose your company has 80,000 in profit before your salary:

1. Pay salary of 12,570. This reduces taxable profit to 67,430 (before employer NI). Employer NI on 7,570 (above 5,000 threshold) = approximately 1,136. Adjusted profit = 66,294.
2. Corporation Tax at 19% on 66,294 = approximately 12,596.
3. Distributable profit = 66,294 - 12,596 = 53,698 available for dividends.
4. Personal dividend tax: 500 at 0% = 0. Remaining 53,198 at 8.75% (within basic rate band) = approximately 4,655.
5. Total take-home: approximately 61,413 (salary 12,570 + dividends 53,698 - dividend tax 4,655 - employee NI 0 on salary within PA).

Compare this with taking the entire 80,000 as salary, where income tax and NICs combined would consume a far larger portion. The salary-plus-dividends approach saves most directors several thousand pounds annually.

The Employment Allowance Exception

If your company has other employees (not just you as the sole director), you may qualify for the Employment Allowance of up to 10,500 for 2025/26. This offsets your employer NI bill and can make higher salaries more attractive. Single- director companies with no other employees are not eligible.

Considerations Beyond Tax

Tax efficiency is not the only factor. Higher salary can help with mortgage applications (lenders prefer salary income), builds a larger state pension entitlement, and provides qualifying earnings for pension contributions. Our detailed salary vs dividends guide explores these trade-offs in full, and our director's salary guide for 2025/26 covers the specific April 2025 NI changes.

Every pound you can legitimately claim as a business expense reduces your Corporation Tax bill. At the 19% rate, a 1,000 expense saves you 190 in tax. At the marginal rate of 26.5%, the saving is even greater. The golden rule from HMRC is that expenses must be incurred "wholly and exclusively" for business purposes.

Common Expense Categories

Here are the expense categories most relevant to limited company directors:

Office and Premises: Rent, business rates, utilities, insurance, and maintenance for business premises. If you work from home, you can claim a proportion of household costs or use the simplified HMRC flat rate (currently 6 per month for 25-50 hours, 10 for 51-100 hours, or 18 for 101+ hours). See our working from home tax relief guide for the detailed calculation.

Travel and Subsistence: Business travel (excluding ordinary commuting), hotel stays, meals while travelling on business. Mileage can be claimed at HMRC approved rates: 45p per mile for the first 10,000 miles, then 25p per mile. Use our mileage calculator to work out your claim.

Professional Services: Accountancy fees, legal costs, bookkeeping, and other professional advice directly related to running your business.

Software and Subscriptions: Business software, cloud services, domain names, hosting, project management tools, and industry-specific subscriptions.

Marketing and Advertising: Website costs, paid advertising, PR, business cards, branded materials, and networking event costs.

Staff Costs: Salaries, employer NI, pension contributions, training, and recruitment costs for any employees (including your own salary).

Insurance: Professional indemnity, public liability, employer's liability (if you have staff), cyber insurance, and key person insurance. See our business insurance guide for what to consider.

Equipment and Assets: Computers, phones, furniture, and other equipment. Items costing less than a few hundred pounds can typically be expensed immediately. Larger items may qualify for capital allowances, including the Annual Investment Allowance (up to 1,000,000) and the full expensing regime for qualifying plant and machinery.

Expenses Directors Commonly Miss

• Use of home as office: Even without a dedicated room, you can claim a flat rate or proportionate costs
• Professional subscriptions and memberships: Industry bodies, professional qualifications, relevant publications
• Training and development: Courses, books, and conferences related to your existing trade
• Bank charges and interest: Business account fees, overdraft interest, loan interest for business purposes
• Telephone and broadband: Business proportion of personal phone bills if used for business
• Trivial benefits: Up to 50 per gift per employee per occasion (not cash or cash vouchers), with an annual cap of 300 for directors

Record-Keeping Requirements

You must retain evidence of every expense you claim. HMRC accepts digital copies of receipts and invoices, so there is no need to keep paper originals. Records must be kept for at least 6 years from the end of the accounting period. A practical system involves photographing or scanning receipts immediately and categorising them in your accounting software. Our record-keeping guide covers what HMRC specifically requires.

VAT is a tax on the value added at each stage of production and distribution. As a limited company, you charge VAT on your sales (output VAT), reclaim VAT on your business purchases (input VAT), and pay the difference to HMRC. VAT is separate from Corporation Tax and operates on its own registration thresholds and return cycles.

Registration Thresholds

For 2025/26, you must register for VAT if:

• Your taxable turnover exceeded 90,000 in any rolling 12-month period (the "historical test")
• You expect your taxable turnover to exceed 90,000 in the next 30 days alone (the "future test")

The deregistration threshold is 88,000. You can voluntarily register below the 90,000 threshold, which may benefit you if your clients are VAT-registered businesses (they can reclaim the VAT you charge) or if you have significant VAT-able purchases. Read our VAT threshold guide for the full breakdown.

VAT Schemes

HMRC offers several VAT schemes designed to simplify administration for smaller businesses:

Standard Accounting: You account for VAT when you issue invoices, regardless of when you receive payment. Suitable for businesses with straightforward transactions and good cash flow.

Flat Rate Scheme (FRS): Instead of tracking input and output VAT separately, you pay a fixed percentage of your gross turnover to HMRC. The percentage varies by industry (typically 9.5% to 16.5%). This reduces admin but may not always save money. Note: "limited cost traders" (those whose goods cost less than 2% of turnover or under 1,000 per year) pay a flat rate of 16.5%, which removes much of the benefit.

Cash Accounting Scheme: You only account for VAT when you receive or make payment, rather than when invoices are issued. This helps with cash flow if you have slow-paying clients. Available to businesses with taxable turnover up to 1,350,000.

Annual Accounting Scheme: You submit one VAT return per year (instead of quarterly) and make interim payments. This reduces paperwork but requires good budgeting.

For a detailed comparison, see our VAT schemes comparison.

Making Tax Digital for VAT

All VAT-registered businesses must comply with Making Tax Digital (MTD). This means:

• You must keep digital records of your VAT transactions
• You must submit VAT returns using MTD-compatible software (not HMRC's online portal)
• There must be a digital link between your records and your return (no manual re-keying)

Most modern accounting software (including AccountsOS) handles MTD compliance automatically. Read more about what this means in practice in our MTD compliance checklist.

VAT Return Deadlines

Under standard quarterly filing, your VAT return and payment are due 1 month and 7 days after the end of each VAT quarter. For example, a quarter ending 31 March has a deadline of 7 May. Late submission under the new penalty points system results in a point per late return, with a 200 penalty once you accumulate enough points (typically 4 for quarterly filers).

Use our VAT calculator to estimate your VAT liability, and check our VAT registration guide if you are approaching the threshold.

Pension contributions through your limited company are one of the most powerful tax planning tools available. When your company makes an employer contribution to your pension, it is treated as a business expense, deductible from Corporation Tax, and crucially, it does not attract any National Insurance or personal income tax at the point of contribution.

Employer Contributions vs Personal Contributions

There are two ways to contribute to a pension as a director:

• Employer contributions: The company pays directly into your pension. These are deductible against Corporation Tax and not subject to NI. This is almost always the preferred route for limited company directors.
• Personal contributions: You contribute from your post-tax personal income. You receive tax relief at your marginal rate (the pension provider claims basic rate automatically; higher and additional rate relief is claimed via your Self Assessment). There is no Corporation Tax benefit because the contribution comes from personal funds.

Annual Allowance

The total pension contributions from all sources (employer + personal) in a tax year cannot exceed 60,000 or your total UK earnings for the year, whichever is lower. However, if you have unused allowance from the previous three tax years, you can carry it forward, potentially contributing significantly more in a single year.

The tapered annual allowance applies if your "adjusted income" (broadly, total income including employer pension contributions) exceeds 260,000. In this case, the 60,000 allowance is reduced by 1 for every 2 of income above 260,000, down to a minimum of 10,000.

Practical Considerations

HMRC will challenge employer pension contributions that are not "wholly and exclusively" for the purposes of the trade. In practice, for contributions that are within the annual allowance and bear a reasonable relationship to the director's role and the company's profitability, challenges are rare. However, very large one-off contributions (for example, contributing all of a bumper year's profits to a pension) may attract scrutiny.

You should also consider the Lifetime Allowance (LTA). While the tax charge on exceeding the LTA was removed from April 2024, the lump sum allowance (limiting tax-free cash) remains at 268,275. Planning around this is important for directors with substantial existing pension pots.

For a full treatment of the strategy, timing, and tax numbers, read our pension contributions guide for limited companies.

As a director of a UK limited company, you have legal duties under the Companies Act 2006 and tax obligations to HMRC. These responsibilities apply even if you are the sole director and shareholder. Failing to meet them can result in fines, penalties, and in severe cases, personal liability or disqualification.

Key Filing Deadlines

Companies House Obligations

Every year, you must file a Confirmation Statement (previously called the Annual Return) confirming your company details are up to date, and your Annual Accounts. As a micro-entity (turnover under 632,000 and balance sheet total under 316,000), you can file simplified, abridged accounts.

From 2025, Companies House requires identity verification for all directors. You will need a Companies House personal code to file your Confirmation Statement. Read our identity verification guide for the step-by-step process.

Self Assessment

As a company director, you must also file a personal Self Assessment tax return each year. This reports your salary, dividends, and any other personal income. The deadline is 31 January following the end of the tax year (e.g. 31 January 2027 for the 2025/26 tax year). See our Self Assessment guide for directors.

PAYE and Payroll

If you pay yourself a salary, you must operate PAYE. This means registering as an employer with HMRC, running payroll each pay period, submitting Real Time Information (RTI) returns, and paying the tax and NI to HMRC by the 22nd of each month (or 19th if paying by post). Even if your salary is below the tax threshold, you should still submit an FPS. Our PAYE for directors guide covers the specifics of director NI calculations (which use the annual earnings period method).

Statutory Registers and Records

You are required to maintain statutory registers including the register of members (shareholders), register of directors, register of directors' residential addresses, register of persons with significant control (PSC), and register of secretaries (if you have one). These can be kept at your registered office or on the Companies House central register.

The weeks before your company's year end are the most important time for tax planning. Decisions made (or missed) during this window can have a significant impact on your tax bill. Effective year-end planning is not about aggressive schemes; it is about making sure you have claimed everything you are entitled to and structured your affairs sensibly.

Timing Strategy

You have some control over when income and expenses are recognised. If you are near a tax threshold (particularly the 50,000 small profits threshold), consider:

• Accelerating expenses: Bring forward purchases you were planning anyway. Buy equipment, pay annual subscriptions, or pre-pay for services before year end.
• Deferring income: If you can legitimately delay invoicing until after your year end (without breaking contractual obligations), this pushes income into the next accounting period.
• Pension contributions: Making a year-end employer pension contribution is one of the most effective tools. A 10,000 employer contribution reduces your taxable profit by 10,000, saving 1,900 at the 19% rate (or more in the marginal band).

Year-End Checklist

In the final month before your year end, work through this checklist:

1. Review your profit forecast. Know roughly where your taxable profit will land. Is it near the 50,000 threshold?
2. Reconcile your bank accounts. Ensure all transactions are recorded and categorised correctly.
3. Chase outstanding invoices. Record any bad debts you need to write off (these are deductible).
4. Review your expenses. Have you claimed everything? Check use-of-home, mileage, subscriptions, and training costs.
5. Consider a pension contribution. If you have headroom within the annual allowance, this is the most tax-efficient extraction method.
6. Review your salary and dividends. Have you taken the optimal amount? Do you need to declare an interim dividend before year end?
7. Check capital allowances. Any equipment purchased this year that qualifies for AIA or full expensing?
8. Plan for next year. Carry-back losses? Change your year end? Adjust your salary for the new tax year?

For the complete walkthrough, see our year-end tax planning guide and our company year-end checklist.

Dividend Timing

Dividends are taxed in the tax year (6 April to 5 April) in which they are paid, not the company's accounting year. This gives you flexibility. If you are close to the higher rate threshold personally, you can time dividends to fall into the most tax-efficient year. Our dividend timing strategy guide covers the nuances of this approach.

After working with hundreds of UK limited company directors, these are the tax mistakes we see most frequently. Each one is avoidable with basic planning.

1. Taking Too Much Salary

Many directors default to paying themselves a "normal" salary of 40,000 or 50,000 without realising how much extra tax and NI this costs. With the employer NI threshold dropping to 5,000 in April 2025, the cost of high salaries has increased further. For most, a salary at the personal allowance (12,570) combined with dividends is significantly cheaper.

2. Mixing Personal and Business Expenses

Using your business account for personal purchases creates a director's loan account balance and can trigger a Section 455 tax charge of 33.75% if not repaid within 9 months of your year end. Keep personal and business spending strictly separate. See our director's loan account guide for the full rules.

3. Missing the Small Profits Threshold

Earning 51,000 instead of 49,000 does not just cost 19% on the extra 2,000. The marginal rate in the 50,000-250,000 band is approximately 26.5%. A small amount of year-end planning can keep you below the threshold and save meaningful tax.

4. Not Claiming All Allowable Expenses

Directors routinely under-claim by thousands of pounds. Common misses include use-of-home allowance, mileage, professional subscriptions, training, telephone costs, and trivial benefits. Every unclaimed pound is a pound you pay tax on unnecessarily.

5. Ignoring Pension Contributions

Employer pension contributions are the single most tax-efficient extraction method after a basic salary. Yet many directors do not make them because the benefit feels distant. A 10,000 employer contribution saves 1,900 in Corporation Tax (at 19%) and avoids all personal tax and NI at the point of contribution.

6. Poor Record-Keeping

Shoebox accounting leads to missed deductions, incorrect returns, and stress during HMRC enquiries. HMRC can and does open random enquiries, and inadequate records make it difficult to defend your position. Digital tools make it easy to stay on top of this throughout the year.

7. Forgetting Self Assessment

Your company files its own tax return, but you as a director must also file a personal Self Assessment return. Missing the 31 January deadline triggers an automatic 100 penalty, plus interest on any tax owed. Many directors forget about this personal obligation.

8. Not Monitoring the VAT Threshold

The 90,000 VAT threshold is based on a rolling 12-month period. If you breach it and fail to register on time, HMRC can backdate your registration and charge you the VAT you should have collected from your clients. Monitor your rolling turnover monthly to avoid an unpleasant surprise.

9. Declaring Dividends Without Sufficient Profits

You can only declare dividends from accumulated realised profits. Paying dividends in excess of available profits makes them "unlawful dividends," which you may be required to repay to the company. Always check your profit and loss position before declaring dividends.

10. Not Planning for Corporation Tax Payment

Your CT bill arrives 9 months after year end, but the money should have been set aside throughout the year. Failing to ring- fence approximately 19% of profits means a cash crunch at payment time. Set up a separate savings account and transfer your estimated tax regularly.