Tax Implications of Running a Limited Company
Tax Implications of Running a Limited Company
Like a lot of contractors, you might be considering setting up and running a limited company. We understand why, especially if you've heard about the possible tax benefits of doing so. But, before you swap to limited company contracting, you need to understand the tax implications of doing so.
At Go Limited, we're here to make sure you know all there is to know about running a limited company, and that includes the tax side of things.
Key Things to Know About Paying Tax as a Limited Company Contractor
When it comes to the tax implications of running a limited company, there's a lot to keep on top of. Though you're bound to have a basic idea of how tax works as a sole trader, things are slightly different when you're running a limited company. You're both the limited company director and a shareholder, which means that you fall into two categories when it comes to paying tax.
As a director, you're responsible for running the company, which includes filing accounts and paying the correct amount of tax, based on your earnings. As a shareholder and contractor, you benefit from the business profits, typically in the form of dividends and salary, depending on how you decide to pay yourself.
Key Points to Remember About Limited Company Tax
1. You're a Separate Entity - When you set up a limited company, you are two separate entities. Your business has its own bank account, pays its own taxes and is legally separate from you. You have a different bank account and pay your own taxes, which aren't part of what the business pays.
2. The Business Has to Pay Corporation Tax - As a limited company director, you need to keep on top of Corporation Tax. Profits are taxed at the company level, and paid to HMRC, before you withdraw them.
3. You Need to Pay Personal Tax - As a limited company contractor, you only pay personal tax on the money you actually take out of the business. This is similar to what happens when you're a sole trader, and you pay it as part of a Self-Assessment Tax Return when you file with HMRC annually.
4. There's an IR35 Risk - Regardless of the industry that you're in, you need to understand IR35 rules. If HMRC considers you to be working as a contractor but effectively an employee, your tax changes significantly, and you could lose a lot of the tax benefits that come with setting up a limited company.
What Tax Do You Need to Pay as a Limited Company Director?
As a sole trader or freelancer, you only had to think about Income Tax. But, as the director and shareholder of a limited company, there's a few different types of tax to be aware of.
Corporation Tax - This is paid on the business' profits, which are calculated by deducting allowable expenses from the business' income. For the majority of businesses, the rate of Corporation Tax is 25%, though some SMEs with profits under £50,000 pay 19%. For profits between £50,000 and £250,000, there's a tapered rate.
Income Tax on Salary - If you pay yourself a salary, you will need to pay Income Tax and National Insurance Contributions (NICs) on that salary. Many contractors purposely keep their salary low - just above the National Insurance threshold - and take the rest as dividends to remain tax-efficient.
Dividend Tax - If you pay yourself dividends alongside a salary, you will need topay Dividend Tax. Dividends are paid from profits after Corporation Tax, and rates are 8.75% for basic rate taxpayers, and 33.75% for higher rate taxpayers.
VAT - If your business has a turnover of £90,000 or more, you will need to pay VAT. You charge VAT on your services, but you can reclaim VAT on expenses. You might be eligible for the The Flat Rate Scheme, which can be beneficial for contractors with low expenses, as you keep a percentage of VAT collected.
Tax-Efficient Ways of Running a Limited Company
A lot of contractors choose to set up a limited company because it's a tax-efficient way of managing a business.
Low Salary and High Dividends - One tax-efficient way of running a limited company is to pay yourself a minimal salary and take the rest of your income as dividends, as dividends are taxed at a lower rate.
Claiming Business Expenses - You can reduce the amount that you're taxed on by claiming business expenses, such as travel equipment, office costs, accountancy fees and professional memberships. By claiming expenses, you reduce your taxable profit, and therefore reduce the amount of tax you have to pay.
Pension Contributions - Employer pension contributions reduce company profits, lowering how much Corporation Tax you have to pay. These are also free from NICs. Plus, it helps to prepare for your financial future.
Using the Flat Rate VAT Scheme - Depending on your sector and business, you might be able to use the Flat Rate VAT Scheme. This can leave you better off compared to the standard scheme.
Using Tax-Efficiency to Increase Take-Home Pay
You're likely to find that running a limited company is more tax-efficient compared to being a sole trader, especially when it comes to take-home pay. As a sole trader, you are taxed on all of your profits as income. You'll pay Income Tax, plus Class 2 NICs and Class 4 NICs, on everything you earn. This can push you into higher tax bands quickly. But, as a limited company contractor, profits are taxed first at Corporation Tax rates. You can then decide how much to take out as salary and dividends. This flexibility usually increases take-home pay.
Sole Trader vs. Limited Company Contractor: Here's How Tax Differs
As a sole trader, you and your business are legally the same. That means all profits are taxed as your personal income, and you pay tax via a Self-Assessment Tax Return each year. However, there's not a lot of room for tax planning and tax-efficiency. You're also responsible
if the business runs into debt or legal issues, and your personal assets - such as property and savings - could be at risk.
Contracting through a limited company creates a separate legal entity. The business pays Corporation Tax on its profits, and you pay Income Tax on the money you pay yourself. Unlike being a sole trader, you'll benefit from limited liability, which protects your personal finances and assets if the business gets into financial trouble.
What's the Trade-Off?
Most people will agree that contracting through a limited company is hugely beneficial, but there is a trade-off. To benefit from the tax-efficiency or running a limited company, you have more administration to deal with. Though being a sole trader is simpler, it's less tax-efficient. A limited company takes more effort to run, but it usually results in higher take-home pay.
Tips for Making Tax Management Easier as a Limited Company Contractor
If you haven't set up and managed a limited company before, you might find the prospect daunting. But, with a little bit of research, guidance and our top tips, tax management can be simple.
Work With a Limited Company Accountant - It's a good idea to work with a limited company accountant, especially if you haven't handled limited company tax before. They can help structure your income, keep you compliant and save you money.
Use Accounting Software - There are a lot of cloud systems out there for you to use, many of which integrate with your bank account. This makes it easier to track invoices and expenses.
Plan Ahead for Tax Bills - You'll have to pay tax annually, and you don't want to be surprised by an unexpected bill, especially if you don't have savings to pay. Set aside around 20 to 25% of your profits - including some for personal tax - to make sure you have enough.
Stay on Top of Deadlines - Corporation Tax, annual accounts, VAT returns and Income Tax all have separate due dates. Missing them leads to penalties, so make sure you stay on top of deadlines.
Understand IR35 Rules - If your contract is inside IR35, you may lose the tax benefits of running a limited company. Always review contracts carefully, as you could run into problems if your IR35 status changes.
Keep Finances Separate - It's important to keep your business and personal finances separate. Use a dedicated business bank account to avoid confusion and simplify bookkeeping. This will help you to keep on top of everything that flows in and out of your business, including expenses.
There are undeniable tax implications of running a limited company, but that's not a bad thing. Though there's more paperwork and responsibility for you as a business owner, director and shareholder, there are huge benefits too. At Go Limited, we've seen just how much take-home pay can be impacted by the tax-efficiency of contracting through a limited company. As long as you understand how limited company tax works and what's expected of you, you're likely to find setting up a limited company works in your favour.
Limited Company Tax FAQ
1. How to calculate tax and National Insurance for a limited company?
A limited company itself doesn't pay National Insurance — it pays Corporation Tax on profits. NI applies to salaries paid to directors or employees.
1. Salary: The company deducts Income Tax and NI under PAYE.
2. Dividends: No NI is due, but dividend tax applies above allowances.
3. Corporation Tax: Paid on profits after business expenses and salaries.
2. How to close a limited company without paying tax?
You generally can't close a company to avoid tax. Before striking off, you must pay Corporation Tax, VAT, PAYE, and any debts.
1. If the company never traded, you may be able to close it with no tax due.
2. If you try to dissolve a company with tax owing, HMRC can object and even investigate.
3. How much should a limited company director pay themselves to avoid paying too much tax?
A common strategy is:
1. Small salary (around the NI threshold) – keeps pension contributions valid but minimises tax/NI.
2. Dividends – to top up income, taxed more lightly than salary.
3. The right mix depends on your other income and allowances, so it's worth tailoring with an accountant.
4. How much is Corporation Tax for a limited company?
Since April 2023:
1. 19% on profits up to £50,000.
2. 25% on profits above £250,000.
3. Between £50k–£250k, a tapered rate applies.
5. How do tax payments and tax returns work in the UK for a limited company?
1. Corporation Tax – payable 9 months and 1 day after year end.
2. Company Tax Return (CT600) – due 12 months after year end.
3. PAYE/National Insurance – monthly or quarterly if you run payroll.
4. VAT – usually quarterly if registered.
5. Director Self-Assessment – required if you receive salary/dividends.
6. How to get money out of a limited company without paying tax?
It's difficult to take money out completely tax-free. Options:
1. Salary – subject to PAYE tax and NI.
2. Dividends – taxed above allowances.
3. Expense reimbursement – tax-free if genuine business costs.
4. Director's loan – repayable and must be managed carefully to avoid tax charges.
7. What are the tax liabilities for a limited company?
1. Corporation Tax on profits.
2. PAYE & NI on salaries.
3. VAT if registered.
4. Business rates (if applicable).
5. Employer's NI for staff.
6. Directors and shareholders also have personal tax on salary/dividends.
8. What if a limited company closes without paying tax?
HMRC can object to strike-off, chase directors personally if there's wrongdoing, and potentially liquidate the company forcibly. In serious cases, directors can be disqualified.
9. What to give your accountant for a limited company tax return?
Typically:
1. Bank statements.
2. Invoices (sales and purchases).
3. Payroll records.
4. VAT returns.
5. Expense receipts.
6. Loan or asset details.
7. Previous accounts if applicable.
10. Does a limited company pay Corporation Tax if it has loans to pay?
Yes. Corporation Tax is due on profits regardless of outstanding loans. Loan repayments themselves are not tax-deductible, but interest may be.
11. How does a limited company director pay tax on dividends above the £2,000 allowance?
Dividends above £2,000 are taxed at:
1. 8.75% (basic rate band).
2. 33.75% (higher rate band).
3. 39.35% (additional rate).
4. You declare this via Self-Assessment.
12. Can you claim lease payments on tax for a limited company?
Yes, lease payments on business vehicles, machinery, or property can usually be deducted as business expenses. Restrictions apply for cars depending on emissions.
13. How do I claim CIS tax back as a limited company?
CIS deductions are offset against your Corporation Tax or PAYE bill. You report deductions on your monthly CIS return and reclaim overpaid amounts via HMRC or when filing your accounts.
14. Does a sole limited company director need to register for Self-Assessment?
Yes, if you take dividends or salary. HMRC usually requires directors to file a personal tax return even if all income is via PAYE.
15. How long does it take to get a tax reference for a limited company?
The Corporation Tax Unique Taxpayer Reference (UTR) usually arrives by post within 3–4 weeks of company incorporation.
16. How much should I put aside for taxes in a UK limited company?
A common rule of thumb:
1. 19–25% of profits for Corporation Tax.
2. Additional savings for VAT (if registered).
3. Budget for PAYE/NI if you pay salaries.
4. Many directors set aside 25–30% of income to stay safe.
17. How to register a limited company to pay tax?
When you register a company with Companies House, HMRC is automatically notified. They'll send your Corporation Tax UTR. You then register for Corporation Tax online and set up any VAT or PAYE schemes as needed.
18. Will becoming a limited company save tax?
Often yes, especially if you can pay yourself partly in dividends. However, savings depend on profit levels and personal circumstances. Other factors like admin, IR35, and accountancy costs should also be considered.
19. How to reduce Corporation Tax in a limited company?
1. Claim all allowable expenses.
2. Use capital allowances for equipment.
3. Make pension contributions.
4. Consider R&D tax relief if eligible.
5. Charitable donations are deductible.
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.
