Limited company tax treatment works differently from tax for a sole trader because the company and the individual behind it are separate.

The company has its own profits, taxes, accounts and filing responsibilities. Meanwhile, the director or shareholder may also have personal tax to consider when money comes out of the company as salary, dividends or benefits.

That distinction is one of the most important things to understand if you run a limited company or are thinking about setting one up.

In this episode, we explain the company side, the personal side and how Corporation Tax, salary, dividends, National Insurance and filing deadlines fit together.

About this episode

Tax often forms part of the decision when choosing between operating as a sole trader and running a limited company.

However, the system becomes easier to follow once we separate the different layers.

With a limited company, there are usually two financial worlds to think about:

• the company and its own tax position
• the individual director or shareholder and their personal tax position

Those two worlds are connected, but they are not the same.

As a result, money earned by the company does not automatically become your personal money simply because you own the company.

A limited company is a separate legal entity

A limited company exists separately from its owners.

That means the company can earn income, incur expenses, own assets, owe money, pay tax and enter into contracts in its own name.

Meanwhile, a director runs the company and makes decisions on its behalf.

If the company is limited by shares, the owners are shareholders. A director can also be a shareholder, which is very common in small owner-managed businesses.

Companies limited by guarantee are different because they do not have shareholders in the same way.

Therefore, when we discuss dividends in this episode, that part applies to companies limited by shares.

“Companies are separate legal entities. They have their own obligations, their own responsibilities.”

How a limited company makes a profit

Let us use the example from the episode: Edwin's Creative Studio Ltd.

Edwin's company earns income by selling services and products. At the same time, it has business costs such as software, marketing, premises, freelancers, professional fees and salaries.

Broadly, income less allowable business costs gives us the starting point for the company's profit.

However, accounting profit and taxable profit are not always identical because tax rules can adjust the accounting figures.

For a broader explanation, see our guide to understanding business profit.

Corporation Tax rates for limited companies

Corporation Tax is the main tax a limited company pays on its taxable profits.

For the current Corporation Tax regime:

• 19% is the small profits rate for companies with profits of £50,000 or less
• 25% is the main rate for companies with profits above £250,000
• Marginal Relief can apply when profits fall between £50,000 and £250,000

Those £50,000 and £250,000 limits assume a normal 12-month accounting period and no associated companies.

For example, associated companies can reduce the thresholds.

Likewise, a shorter accounting period can reduce the limits proportionately.

Therefore, the headline percentages are useful for understanding the system, but the final Corporation Tax calculation depends on the company's actual circumstances.

Allowable expenses and taxable profit

Business costs can reduce taxable profit when they meet the relevant Corporation Tax rules.

Typical costs may include commercial rent, advertising, accountancy fees, freelancer costs, employee salaries and business software.

However, not every payment automatically becomes a tax-deductible expense.

Instead, the treatment depends on what the cost is, why the company incurred it and the tax rules that apply.

For larger purchases such as equipment, capital allowances may also affect the tax calculation.

How directors take money from the company

The next layer is the individual.

A director may need money from the company to live on, but there are several ways that money can leave the company.

For example, a payment might be:

• a salary through payroll
• a dividend to a shareholder
• reimbursement of a genuine business expense
• a taxable benefit provided by the company
• a director's loan in the right circumstances

Each route has different tax and legal consequences.

As a result, money should not simply move from the company bank account without knowing what the payment represents.

Director salary and PAYE

If the company pays a director a salary, that salary normally goes through payroll.

Therefore, the company may need to register as an employer and operate PAYE.

PAYE is the system used to collect Income Tax and National Insurance from employment income.

Meanwhile, the salary can normally form part of the company's employment costs when calculating taxable profit, subject to the usual tax rules.

However, there is no single magic salary that works for every director.

Other income, National Insurance, pensions, Employment Allowance eligibility and the company's wider tax position can all affect the answer.

Employer National Insurance in 2026/27

A limited company may also have to pay employer National Insurance on salaries.

For the 2026/27 tax year, the standard employer Class 1 National Insurance rate is 15% on earnings above the relevant Secondary Threshold, which is £5,000 a year for a standard employee.

However, special categories and reliefs can change the calculation.

For example, Employment Allowance can reduce the employer National Insurance bill for eligible businesses.

Not every company qualifies, so salary planning should reflect the actual company rather than a standard figure copied from somebody else.

How dividends work

Dividends are different from salary.

A dividend is a distribution of company profit to shareholders.

Therefore, dividends only apply where there are shareholders, which is why the distinction between company types matters.

Importantly, dividends are not a business expense for Corporation Tax purposes.

First, the company calculates and pays Corporation Tax on its taxable profits.

Then, where sufficient distributable profits are available, the company may pay some of those profits to shareholders as dividends.

Dividends must also be properly declared and recorded.

So you cannot simply label any withdrawal as a dividend when there are not enough profits available to support it.

Dividend tax for 2026/27

The shareholder may then have personal tax to pay on dividends received.

For the 2026/27 tax year, the dividend allowance is £500.

Dividend income above the available allowance is taxed according to the individual's tax band.

The current dividend rates are:

• 10.75% at the basic dividend rate
• 35.75% at the higher dividend rate
• 39.35% at the additional dividend rate

However, you cannot work out the correct rate by looking at the dividend in isolation.

Instead, the shareholder's other income also affects which tax band the dividend falls into.

As a result, salary and dividend planning needs to look at the individual and the company together.

For more on wider tax planning, see our guide to tax efficiency and benefit planning.

How salary and dividends differ

Salary and dividends may both put money into the director's hands, but they work differently.

A salary normally goes through payroll, may attract Income Tax and National Insurance, and can create employer National Insurance for the company. Subject to the usual rules, it may also reduce the company's taxable profit.

Dividends, by contrast, go to shareholders from available company profits. They are not deductible for Corporation Tax, they do not attract National Insurance, and they may create personal dividend tax.

Therefore, the mix between salary and dividends can affect both the company and the individual.

However, tax should not be the only consideration.

Cash flow, company profitability, pensions, other income and the legal rules around distributions also matter.

Limited company filing and tax deadlines

A limited company has its own filing responsibilities.

For an established private limited company, the main deadlines normally include:

• annual accounts: generally filed with Companies House within 9 months of the company's financial year end
• Corporation Tax payment: normally due 9 months and 1 day after the end of the Corporation Tax accounting period
• Company Tax Return: normally due 12 months after the end of the accounting period

First accounts can follow different filing deadlines.

Also, very large companies can have different Corporation Tax payment rules.

Therefore, do not assume that every company follows exactly the same timetable.

One interesting feature is that the Corporation Tax payment deadline usually arrives before the Company Tax Return filing deadline.

As a result, it often makes sense to complete the accounts and tax work together rather than deliberately waiting to file the return later.

Why record keeping matters

Good records support nearly every part of limited company tax.

You need reliable information for sales, costs, payroll, assets, amounts owed, dividends, Corporation Tax and annual accounts.

In addition, good records help if HMRC asks questions about figures reported by the company.

More importantly, the records should help you understand what is happening in the business rather than existing purely for compliance.

“There is a legal obligation placed on your shoulders.”

Digital accounting systems can make record keeping easier when we use them properly.

If you are looking at Xero, see our guide to getting started with Xero accounting.

How limited company tax treatment fits together

The overall flow can be thought of in stages.

1. Income comes into the company. Sales and other taxable income form the starting point.
2. Allowable costs are considered. These help determine the taxable profit.
3. Corporation Tax is calculated. The company deals with its own tax liability.
4. A director may receive salary. Payroll and PAYE rules can apply.
5. Shareholders may receive dividends. Sufficient distributable profits must exist first.
6. Personal tax is considered separately. Salary, dividends and other income feed into the individual's position.

Once we separate those steps, the system becomes much easier to understand.

FAQs

What tax does a limited company pay?

The main tax on company profits is Corporation Tax. Depending on its circumstances, a company may also have employer National Insurance, VAT or other tax obligations.

What is the Corporation Tax rate in 2026?

The small profits rate is 19% for profits of £50,000 or less, while the main rate is 25% for profits above £250,000. Marginal Relief can apply between those figures. Associated companies and short accounting periods can reduce the limits.

Can a director take a salary from the company?

Yes. A director can receive a salary, which normally goes through payroll. Income Tax and National Insurance may apply depending on the salary and the individual's circumstances.

Are directors allowed to take dividends?

A director who is also a shareholder may receive dividends if the company has sufficient profits available for distribution and follows the correct dividend procedures.

Are dividends a business expense?

No. Dividends are distributions of profit to shareholders and are not deducted as a business expense when calculating Corporation Tax.

How much is the dividend allowance for 2026/27?

The dividend allowance is £500. Dividend income above the allowance may be taxed at 10.75%, 35.75% or 39.35% depending on the individual's tax band.

How soon must Corporation Tax be paid?

For most companies, Corporation Tax is normally due 9 months and 1 day after the end of the relevant accounting period. Different payment rules can apply to large companies.

What is the Company Tax Return deadline?

The Company Tax Return is normally due 12 months after the end of the accounting period it covers.

How long does a private company have to file annual accounts?

For an established private company, annual accounts are generally due 9 months after the company's financial year ends. First accounts can follow different deadlines.

Episode Timecodes

• Choosing between sole trader and limited company - 00:00
• What a limited company is - 00:43
• Companies limited by shares and guarantee - 01:03
• Company income, expenses, salary and dividends - 02:09
• Corporation Tax and employer National Insurance - 02:56
• Calculating company profits - 03:38
• Corporation Tax rates and Marginal Relief - 04:28
• Example company profit calculation - 05:17
• PAYE and director salary - 05:39
• Employer National Insurance - 06:13
• When dividends apply - 07:11
• Dividends and company profits - 07:29
• Personal tax on dividends - 08:15
• Why professional advice may help - 09:03
• Company responsibilities and deadlines - 09:20
• Accounts, Corporation Tax and CT600 deadlines - 09:37
• Record keeping for limited companies - 10:38
• Digital accounting and final takeaway - 11:18

Related episodes and guides

• Taxes and Financial Planning
• Tax Efficiency and Benefit Planning
• Understanding Business Profit
• Getting Started With Xero Accounting

Key takeaway

Limited company tax treatment becomes easier to understand once you separate the company from the individual.

First, the company earns income, pays business costs and calculates its taxable profit.

Next, Corporation Tax applies to the company.

Meanwhile, directors and shareholders may receive money through salary, dividends or other routes, each with its own tax treatment.

Finally, the company must keep proper records, meet its filing deadlines and make sure money is taken out correctly.

Understanding those different layers gives you a much clearer picture of how a limited company works financially and helps you make better decisions about tax, cash and remuneration.

Further Support

If you need help understanding your limited company's tax position, director remuneration or financial reporting, you can contact us for an initial chat.

You can also use our free online business calculators to support your financial planning.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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Tax is an inevitable consideration when people are choosing which business structure to adopt. In the main, the business structures tend to gravitate between a sole trader or a limited company. In last week's podcast episode for I Hate Numbers, I looked at the overview of the tax treatment for sole traders.

This week, I'm going to have a look at limited companies. Now, if you do run a limited company or you're thinking of starting one, having an awareness of how the tax system works on both the company and you, is an important part of your business toolkit. I'll do my best to put things into straightforward non-jargony terms.

I'll throw in some examples. Let's crack on.

Worthwhile understanding what a limited company actually is. Now, a limited company is a separate legal entity from its owners. That means the company is responsible for its own finances, debt, and taxes. One thing we've also got to bear in mind, when we come into the context of a limited company, I would actually subdivide that into two categories.

Category one, is a limited company that's formed with what are called shares. So you become the shareholder and investor. And the other type of company is one that doesn't have share capital. Instead, it might be what's called limited by guarantee. And it's important to understand that distinction, because some of the things we're going to mention like dividends,

do not apply to companies that are limited by guarantee. I'm going to deal with this topic in more detail in a subsequent podcast, but for now, when I make references to dividends and shareholders, remember that only applies for companies that are limited with shares. Now, either way, irrespective of the type of company we're talking about, the individual who effectively runs the company, who effectively owns the company, is going to be called a shareholder, for shares and if you're the person who actually makes those day-to-day decisions and operates and runs the company you're going to be classified as a director. Now, the income that accrues to you from the company that has paid out you, that is part of your personal finances and is dealt with separately from the company's tax affairs.

Now, let's assume Edwin. Edwin decides to set up Edwin's Creative Studio Ltd. The company earns income by selling its services. It's got obligations to pay out expenses such as software costs, consulting fees, and you're going to pay tax on the business profits it generates. Now, Edwin obviously needs to live, he needs to survive, so he decides to take out a salary from the company.

Typically you would have to register with HMRC to set up a payroll scheme, and if it's a shareholding company he'll be taking out also some of that income in the form of dividends. I'd also throw in the option of benefits as well, but again a topic for another day. Let's just assume for now it's a salary and dividends. Now, look at the tax the company itself pays.

Now for Edwin's Creative Studio Ltd, there will be two taxes it's going to be exposed to. Number one, there's the Corporation Tax. And Corporation Tax is payable on all the profits the company makes. This will be its primary tax. Now, in addition, the company may also be liable to something called Employers National Insurance Contributions, NMICs for short.

Now, if the company does take on staff, has employees, including the director, then it may be liable to pay National Insurance Contributions as an employer. Now, currently, whether it pays National Insurance depends on a number of variables like the level of salary that's been paid out, but let's address that later on in the podcast.

Now let's look at the Corporation Tax situation. Now Corporation Tax is charged on the company's profits. Essentially, you look at the income that you've generated, the turnover if you wish, what you've sold, the services you're providing, the products you're selling. You take off all the allowable expenses, so if there's any advertising costs, rent paid out for storage, rent paid out for any facilities, payment of freelancers, payment of the accountant's fee, let's not forget that one, payment of Edwin's own salary and the salary of his staff.

Whatever's left over, typically, is the profits. If Edwin also has bought any equipment, then also he'd be able to claim the cost of that equipment as well. There are currently, there are three headline rates for Corporation Tax in the United Kingdom. Now these rates are based on Edwin only having one company, and the rates are as follows.

Now for the year 24/25, so that's from the 1st of April 24 onwards, is 25%. If that company's profits are over 250,000 pounds, if the profits for that company are below 50, then you pay 19%. But if you've got profits in between those two figures, then you will pay 25% on the profits and then you deduct something that tax people call a marginal rate.

As a heads up, the closer your profits are to 50, the bigger the relief will be. The closer your profits are to 250, the smaller the relief will be. Now, let's phone some numbers. The Edwin's Creative Studio earns 120,000 pounds by way of turnover for the services it provides, the products themselves. It also has 40,000 pounds that’s spent on expenses, so that's office rent, marketing costs, freelancer costs and the like.

And that means Edwin's profit for the year is 80,000 pounds. Now Edwin, profits of 50 falls between that magic number of 50, 000 and 250, 000. So Edwin in corporation tax terms will pay 25% on that figure and then deduct an interesting calculation, what's called marginal relief. I mentioned earlier on about salaries and National Insurance.

Now if your limited company has employees and that includes yourself as a director taking out a salary, that it needs to handle something called PAYE. PAYE, by the way, folks, as a bit of historical background, was introduced in 1944. The employer, in this capacity, once they're registered, operates as an unpaid tax collector.

The operation of the system is down to the employer, with the usual obligations and responsibilities placed on them. Now, Edwin decides that his salary will be the magic figure of 12,570. That's his salary. And that salary, by the way, will be treated as tax free, because that's equivalent to Edwin's personal allowance.

If Edwin actually had a salary greater than that, and there could be a number of good reasons for going beyond that, then the company will pay employers national insurance contributions on the excess over 12,570. Now, rates change all the time. Currently, in the year that we're talking about, 24/25, the limit is 9,100.

Anything over that, you're paying National Insurance at 13.8. But there's also a change from the 1st of April 2025, when it becomes 15 percent over 5,000. Now, there is a compensation, by the way, of what's called Employer's Allowance, but let's not get too complex and bogged down. We'll be dealing with that in a subsequent podcast.

And there's a link, by the way, for a video on the Budget 24 overview. I digress. Now on that 20,000-pound salary, the company currently will have to pay 1,500 pounds. If Edwin is the only director, no other employees, then there's no relief from that 1,500 pounds. Now I mentioned dividends earlier on, and remember this only applies to companies that have got shareholders.

If you don't have shareholders, if you're an arts organisation, a not-for-profit organisation, a CIC perhaps, that hasn't got share capital, dividends do not apply to you. Now, if you've got a private company that's got shares and you extract money beyond your salary, that would normally be classified as dividends.

Now, dividends are taken out of, legally and commercially, out of companies after tax profits. They're not considered to be tax-deductible costs. They're not business costs. That's just giving up the profit the company has made and giving it to the owners. It doesn't attract national insurance, but it attracts tax, nevertheless

in the individual's tax return. So for example, if we take Sarah, she's got 60,000 of profit, let's say for argument's sake, that's 60,000 after paying tax, 20,000 of that, she decides to withdraw as dividends and the rates will go as follows. Now, remember this is now personal tax for Sarah, so she will be doing a personal tax return and including on her personal tax return the dividends she's taken out as well as the salary and anything else there might be.

Now for the dividends, the way it works, the first 1,000 pounds for 24/25 is free. Thank you very much HMRC. Anything over that, as long as Edwin remains a basic rate taxpayer, he'll be paying 8.75 percent on those dividends. And anything over that, if Edwin becomes a higher rate taxpayer, because of the income he's got in that year, then he'll pay 33.75 percent.

A big jump up there. So, let's say for argument's sake Edwin in our fictional example has no other income, and for personal tax has 12,570 salary, 20,000 dividends, the total income for Edwin is 32,570. The first grand of the dividends is tax free, the remaining 19 percent of those dividends are him still as a basic rate taxpayer, and he'll pay 8.75 percent.

That's about 1660 odd quid. Now the dates, the numbers can be quite confusing. Again, if you haven't got an accountant to help you with this, it's probably an idea to do so. Now, the last couple of things I want to look at is the filing and the deadlines. So let's go back to our company. Companies are separate legal entities.

They have their own obligations, their own responsibilities. And in any system of tax or compliance, if you don't follow the rules, there will be a financial consequence. If you really are going to be really naughty, there could be also a much harsher punitive outcome as well. Now, here's the key deadlines.

When it comes to the document, the Corporation Tax return, CT600, if you want the official word, they're matched due 12 months after the end of your company's financial year. The annual accounts need to get to the company's house, the regulator, within nine months of the end of your financial year. The PAYE, the National Insurance Contributions, you can elect to pay them quarterly or monthly.

And peculiarly, by the way, the tax that you pay, the Corporation Tax, also has to be paid within nine months of the end of your financial year. So perversely, you pay the tax and you could submit the tax return three months later. My advice would be, submit them at the same time. And that's what we do for our clients.

So let's give some illustration here. Edward's financial year ends on the 31st of March 24. He has got to file the company accounts by the 31st of December 2024. Remember that's the accounts for the company, not his personal return. The tax has got to be paid also by 31st of December 2024. And the actual Corporation Tax return, technically speaking, he's got until the 31st of March 2025.

And when it comes to record keeping, record keeping is important, whether it's personal tax or Corporate Tax, but it's vital for limited companies. As a director, you have a responsibility for the company, even though it might be yours. There is a legal obligation placed on your shoulders. You need clear records, not only to track your income and your expenses, not only for compliance to help you complete the returns and the documentation, but also to give you good insight as well.

And also a possibility, HMRC may decide to have a look at those records and you as the taxpayer and the director of the company have a responsibility to make sure those records are kept adequately. My own personal preference would be that people go into digital. Cough, cough, Xero is a good tool to use.

There are other tools out there in the marketplace, but make sure you've got good record-keeping systems. So folks, I hope you found this useful. Hope that's given you an understanding here. In future episodes, we're going to be diving deeper, but it's good to have an overview about how the system works for companies.

Until next time, happy taxation. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week, for another I Hate Numbers episode.