What tax does a limited company pay?

Introduction

Thinking about starting a limited company, but wondering about the tax implications? Limited companies are a tax-efficient way to run a business in the UK, even after recent rises in dividend rates and National Insurance Contributions (NICs). Plus, they offer greater flexibility and protection for owners. Here, you'll discover the taxes a UK limited company pays, including Corporation Tax, VAT, and Business Rates, plus Income and Dividend Tax for owners. Learn how to minimise your tax bill and compare the efficiency of a limited company vs. a sole trader.

How much tax will I pay in a limited company?

The amount you hand over to HMRC each year depends on your profits, and whether you:

• Are registered for VAT
• Employ people
• Have property liable to business rates

Business owners who are also directors may also be liable for Income Tax and National Insurance Contributions (NICs) on their salary, as well as tax on their dividends. So, it depends how much you pay yourself in each.

What your company owes

• Corporation Tax (CT). For 2025/26, companies with annual profits under £50,000 pay a rate of 19%. Those with profits over £250,000 pay 25%. Between those two figures, CT gradually increases between 19% and 25%.
• Employer’s NI, if you run payroll for staff, including your salary. The standard rate is 15% on each pound earned by employees above the secondary threshold of £5,000 a year. Below that, the rate is zero.
• VAT. If your turnover exceeds the compulsory registration threshold of £90,000, you must charge VAT on your sales – at 0%, 5% or 20% depending on the product or service – then pay it over to HMRC. If you’re not registered, you still pay the tax on VATable items and services you procure for the business, but you don’t submit VAT returns or pay anything over to HMRC because you’re not charging VAT on your sales. If you register, you can reclaim VAT on certain business purchases.
• Business rates, if you have qualifying premises. Standard rates are 49.9% for properties with a rateable value of below £51,000 and 55.5% for those above that amount. Reliefs are available for some firms – estimate your bill with this government tool. As of April 2026, these rates will be lower for some smaller firms and higher for some larger ones. Business rates are calculated differently in Scotland and Northern Ireland.

What you owe

Your employees, who include you if you take a salary, owe tax on income over the personal allowance (PA) of £12,570 in 2025/26. Below this, Income Tax is zero. If your salary is over £100,000, the standard PA tapers down by £1 for every £2 you earn above that level. So, when your income reaches £125,140, your PA becomes zero.

The Income Tax rates for England, Wales and Northern Ireland are:

The tax bands and rates in Scotland are:

You may pay employee’s NICs of between 0% and 8% based on government categories and thresholds.

Owners are also liable for Dividend Tax. If you have no other income sources, you pay nothing on dividend income within your PA, plus the dividend allowance of up to £500 for 2025/26, equalling £13,070 of tax-free income. On dividends above that total, you pay different dividend rates depending on your tax band:

• Basic rate – 8.75%
• Higher rate – 33.75%
• Additional rate – 39.35%

These dividend rates will increase by 2% for basic and higher rates from April 2026. Therefore, the rates will be 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.

What are the tax benefits of owning a limited company?

When you pay yourself salary, it’s taxed as income, subject to NICs, and deductible for CT. When you pay yourself dividends, they do not attract NICs but are subject to dividend rates, which are currently lower than the Income Tax and NIC rates combined. You can only pay dividends if profits allow, and they are not deductible for CT. So, if you’re making a profit, you can often pay yourself more dividends to increase tax efficiency.

Gemma Hing, director at Carroll Accountants, says: “Limited company owners have more flexibility on how and when they are taxed depending on how they draw money out, which is likely to result in a beneficial tax position. For example, most directors use a mix of salary and dividends to achieve the most efficient position.”

However, Hing highlights that from April 2025, Employer’s National Insurance increased from 13.8% on earnings above £9,100 to 15% on earnings above £5,000. “This made limited companies less beneficial than previously, whether you employ other people or just yourself,” she says. “But if the company qualifies for the Employment Allowance saving on Employer’s NI, this helps offset the increase.”

Employment Allowance reduces annual Employers’ Class 1 NICs by up to £10,500 in 2025/26, for eligible employers.

While not directly related to tax, the limited liability in a company is also a vital benefit, as it protects your personal assets if you go bankrupt.

Example 1: Company director earning £50,000

Here are two examples provided by Rob Jones, founder of RJF Accountants.

In 2025/26, a company director might pay tax on £50,000 profit as follows.

• Take a salary up to the PA and employee’s NI threshold of (£12,570) – with zero Income Tax and NI. This leaves a profit after salary of £37,430.
• Pay CT on profits before dividends at 19% (£7,111).
• Take the remaining £30,319 as dividends. After the dividend allowance of £500, taxable dividends are £29,819. The dividend rate of 8.75% on that equals £2,602.
• The total bill to HMRC is £9,713.

After April 2026, the extra 2% dividend rate will increase the part of the bill to £3,205, and the total to £10,316 – a rise of £603.

Example 2: Self-employed earning £50,000

A sole trader earning the same amount would also typically take the tax-free PA of £12,570. They’d then pay Income Tax of 20% on £37,430, equalling £7,486. Class 2/4 NICs would be £3,346. So, the total tax and NICs would be £10,832.

“This shows that even after the dividend increase, for most small owner-directors, a ‘salary to NI threshold plus dividends’ strategy will still be more efficient than taking all profits as salary,” says Jones.

“Also, at this level, the limited company route is still usually more tax efficient than being a sole trader, but the gap will narrow. For profits below £40,000, the difference is marginal, and the easier administrative burden for sole traders may be attractive.”

Finding the exact mix for you depends on your circumstances, and we recommend taking professional advice.

Limited companies and tax: Pitfalls to avoid

Jones says the most common tax errors made by limited company directors are:

• Not registering for VAT, Income Tax, and Corporation Tax on time, which can lead to backdated liabilities and penalties.
• Not keeping good records from day one, leading to missed expenses or issues in HMRC checks.
• Taking dividends when you don’t have enough profits. This can be classed as a director’s loan and result in an overdrawn loan account and extra tax.
• Not setting aside enough money to pay tax bills.
• Not running proper payroll for salary, including directors. A specialist provider is recommended.
• Missing deadlines, which can incur penalties and interest. For example, if you file your Company Tax Return late, HMRC applies escalating penalties. Missing the payment deadline can also result in interest charges.

How can I reduce my tax as a limited company owner?

In addition to optimising your salary and dividend balance, there are several ways to minimise your bill in a limited company:

• Claim all allowable business expenses, from travel to mobile phones, computing, training, subscriptions and use of home as office.
• Maximise your pension contributions from company profits. These contributions are also legitimate business expenses, so they can help reduce CT significantly.
• Consider timing your dividends and salary payments around the end of the tax year to maximise the use of bands and allowances.
• Keep profits in the company rather than paying them out as dividends. This avoids Dividend Tax and allows you to reinvest, reduce debt, or build a cash buffer.