Tax Considerations for Limited Company
Go Limited - Tax Considerations for Contractors Operating as a Limited Company
If you’re thinking about setting up a limited company for contracting, you need to know what that means. It’s not simply a case of setting up a limited company and getting started, assuming everything stays the same as being a sole trader or freelancer. As well as running your own small business - and managing everything that goes along with that, such as clients - you need to familiarise yourself with the administrative and legal side of operating through a limited company, which includes tax considerations.
At Go Limited, we know that operating as a limited company is hugely appealing, but we also know a lot of contractors are put off by the tax side of things, assuming it to be a complex area. Luckily, that’s not always the case, as long as you do your homework. Keep reading to find out more about the tax considerations for contractors operating as a limited company, and what they mean for you.
The Tax Benefits of Operating as a Limited Company Contractor
You don’t have to be a limited company expert to know there are many benefits that come with operating as a limited company contractor, which is why it’s a route so many sole traders end up taking. But, it’s the significant tax advantages it offers that seal the deal for many. Once you’ve set up your limited company, it’s time to consider what that means in terms of tax.
Tax-Efficient Income
When you’re a contractor operating as a limited company, you can structure your income in a tax-efficient way. You can pay yourself a small salary, keeping within your personal allowance, and then top up your income with dividends. As dividends are taxed at a lower rate than salary, you keep more of what you earn. There’s a lot of ways to pay yourself as a limited company contractor, so it’s important to choose an approach that keeps more money in the bank.
Claiming Business Expenses
Contractors operating as limited companies can deduct expenses from business profits before tax, as long as they are deemed allowable by HMRC. By claiming expenses, you reduce your taxable profit, which lowers your tax bill. There’s a range of allowable expenses for a limited company, and yours will depend on your business’ outgoings. Software and equipment, business travel and mileage, home office costs, training, upskilling, insurance and accountant fees are all options.
Corporation Tax vs. Income Tax
When you’re a sole trader, you only have to worry about Income Tax. But, as a contractor operating as a limited company, you need to think about Corporation Tax too. Limited companies need to pay corporation tax on profits, which is often lower than the income tax rates that sole traders have to deal with. For example, Corporation Tax is currently set at 19%, whereas Income Tax rates are 20%, 40% and 45%, depending on your earnings.
Pension Contributions
When you operate as a limited company contractor, you can make employer pension contributions directly to your pension fund. These are a tax-deductible expense for the business, and they don't count as personal income. This helps you to save for retirement, whilst also reducing your corporation tax bill.
Limited Company Tax Isn’t as Complicated as You Think
One of the main reasons contractors shy away from setting up a limited company is the fear of it being too complicated. There’s paperwork, deadlines, penalties and HMRC to think about, and it’s a lot more responsibility than being a sole trader. The fear of tax complexities puts some people off, when it really shouldn’t. There’s no need for you to manage limited company tax alone, as there’s a whole host of help out there, including specialist limited company accountants. Plus, it’s probably not as complex as you think it is.
With the right setup and a bit of professional help, you can simplify and streamline limited company tax, making it one less thing for you to think about. Your payroll can be automated, your VAT and tax can be handled by an accountant, and your allowable expenses can be tracked using an app.
Debunking Common Myths About Limited Company Tax
If you’re a contractor operating as a limited company - or you’re a sole trader thinking about setting up your own company - you need to know as much as possible about limited company tax. The more you know, the easier tax is to navigate. There’s a lot of information out there, but not all of it is accurate. Some of it’s outdated, and a lot of it completely wrong. To ensure you’re on the right path, we’re going to clear up a few of the most common limited company tax misconceptions.
- It’s Only Worth it if You Earn Six Figures - There’s a common misconception that setting up a limited company is only worth it if you earn a lot of money. But, that’s not always the case. Even contractors who earn a modest amount can benefit from the tax efficiencies that come with having a limited company. With limited company tax planning and the right strategies, setting up a limited company is worth considering, regardless of what you earn.
- Dividends Are Always Tax Free - Dividends are taxed differently to a salary, but that doesn’t make them tax-free. When you have a limited company, you get a tax-free dividend allowance - this is £500 per year - and then you pay dividend tax rates on the rest, depending on your income band. They're still lower than income tax rates, but they’re not completely tax-free.
- Running a Limited Company is Too Complicated - Though there’s more admin than being a sole trader, running a limited company isn’t as complicated as you might think. A lot of the responsibility can be streamlined or handed over to an expert. If you make use of the tools available to you - such as accounting apps, bookkeeping apps and expense tracking channels - you’ll be able to get your head around everything.
- You Can Claim Anything as an Expense - One of the main benefits of operating as a limited company is claiming benefits. But, you can’t claim everything. Only business-related, wholly necessary expenses can be claimed, and HMRC isn’t afraid to investigate to make sure you’re following the rules. Trying to claim for personal items or lifestyle costs can get you in trouble.
Our Top Tips for Smart Limited Company Tax Planning
If you want to make the most of your limited company setup, you need to prioritise limited company tax planning. This ensures you stay efficient, compliant and stress-free.
- Get Your Salary Right - It’s a good idea to pay yourself just enough to use your personal allowance and keep your National Insurance low, and then top up your income using dividends.
- Use Your Dividend Allowance Wisely - Dividends can be drawn tax-efficiently up to the limit and beyond, depending on your income band. Plan these in advance to avoid jumping into higher tax brackets, and always be aware of what you’re taking and when.
- Track and Claim Legitimate Expenses - If you want to claim allowable expenses, you need to track them. You don’t want to miss out on deductions that are rightfully yours, simply because you didn’t track everything. This is why a lot of limited company contractors use cloud-based software or apps to track receipts and mileage, adding expenses in real-time.
- Plan for Corporation Tax - You don’t want to get to the Corporation Tax deadline, only to find that you haven’t put enough money aside to pay the bill. To make sure you’re not caught short, set aside a percentage of your profits for tax every month. This ensures the bill never feels like a surprise and you have enough to pay on time.
- Get Professional Support - There’s a lot of professional support out there, so make sure you’re taking advantage of it. There’s online resources, software and platforms designed to simplify limited company contracting, as well as expert accountancy services. An accountant will not only file your tax returns, but they’ll also advise you on structure, timing of payments, dividends, and updates.
When you’re running a limited company as a contractor, you immediately open the door to a host of tax benefits. But, you can only take advantage if you understand how limited company tax works. At Go Limited, we have the knowledge and expert knowledge needed to ensure you’re managing your limited company tax in the right way, making it as simple and manageable as possible. Rather than being a burden, use operating as a limited company to your advantage and make the most of the tax-efficient benefits available to you.
FAQ: Tax Considerations for Contractors Operating as a Limited Company
1. What taxes do I need to pay as a limited company contractor?
As a limited company contractor in the UK, you’ll typically need to pay:
- Corporation Tax (on company profits)
- Income Tax (on salary or dividends taken from the company)
- National Insurance Contributions (NICs) (on salary)
- VAT (if registered)
- Possibly IR35-related taxes if you fall inside IR35 rules.
2. What is the Corporation Tax rate for limited companies?
As of 2025, the main Corporation Tax rate is 25%, but if your company earns profits of £50,000 or less, you may qualify for the small profits rate of 19%. A marginal relief applies for profits between £50,001 and £250,000.
3. Can I pay myself a salary and dividends to reduce tax?
Yes, this is a common approach. Most contractors take a low salary (to stay tax-efficient) and then pay themselves dividends from company profits. Dividends are taxed at a lower rate than salary but must be paid only from retained profits.
4. Do I need to register for VAT?
If your company’s VAT-taxable turnover exceeds £90,000 (as of 2025), you must register for VAT. Even if you’re under the threshold, voluntary registration may be beneficial—especially if your clients are VAT-registered businesses.
5. How does IR35 affect my taxes?
If your contract is inside IR35, your income is treated similarly to that of an employee. This means more income is subject to Income Tax and NICs, and you can’t take advantage of the usual dividend/salary split. If your contract is outside IR35, you retain full control over how you pay yourself.
6. What expenses can I claim through my limited company?
You can claim tax-deductible expenses that are “wholly, exclusively and necessarily” for business purposes. This may include:
- Travel and accommodation
- Equipment and software
- Accountancy fees
- Use of home office
- Business insurance
- Professional subscriptions
- Note: Some expenses are restricted if you’re inside IR35.
7. Do I need an accountant?
While it’s not a legal requirement, most contractors find having an accountant essential. A good accountant helps you stay compliant, reduce your tax bill, and avoid costly mistakes—especially when dealing with IR35, VAT, and Corporation Tax.
8. How do I stay compliant with HMRC?
You’ll need to:
- Submit annual Company Accounts and a Corporation Tax return (CT600)
- File a Confirmation Statement
- Pay tax bills on time
- Keep detailed records and receipts
- Meet any PAYE and VAT obligations
- Missing deadlines can result in fines and interest.
9. Can I still use a limited company if I'm inside IR35?
Yes, but the tax benefits are significantly reduced. If you're consistently inside IR35, you may consider alternatives such as working through an umbrella company, which simplifies compliance and avoids company admin.
10. What happens if HMRC investigates me?
HMRC may open an enquiry to check your IR35 status or your accounts. If they find errors or deem you non-compliant, you could face penalties, backdated tax, and interest. Keeping clear records and having IR35 insurance can help mitigate the risk.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
