How are limited companies and company directors taxed?

One of new business owners’ most frequently asked questions is: how are limited companies taxed?

A limited company is a distinct legal entity. Unlike a sole proprietorship, a company’s and its directors’ financial affairs are completely separate.

As a director, you are responsible for your company’s tax affairs. You need to:

• Understand how companies are taxed.
• Register your company for all applicable taxes – Corporation Tax, VAT, and payroll taxes.
• Submit your company’s tax returns on time.
• Pay your company’s tax liabilities on time.

Here is a summary of the main taxes that you will encounter as a company director to help you get started.

This guide has been updated for the 2026/27 tax year.

1. Corporation Tax (CT)

When you incorporate a new company, you must register with HMRC for Corporation Tax within 3 months of starting to do business.

Once your business is up and running, it must pay Corporation Tax on its annual profits.

Your accountant will submit your annual accounts data to HMRC via a CT600 form, and the directors must pay any tax owed within nine months and a day of the company’s year-end.

Corporation Tax rates increased from April 2023. Companies with profits up to £50,000 pay the 19% small profits rate, while those with profits over £250,000 pay the 25% main rate. Marginal Relief applies between these thresholds.

Annual Profits	April 2023 onwards	2022/23
Up to £50,000	19%	19%
£50,001 – £250,000	Marginal Relief applies	19%
Over £250,000	25%	19%

The effective marginal Corporation Tax rate on additional profits within the marginal relief band can reach 26.5%. The £50,000 and £250,000 thresholds are also reduced where a company has associated companies.

You can view the current Corporation Tax rates and thresholds on GOV.UK.

Work out your tax liability with our limited company tax calculator.

2. Value Added Tax (VAT)

VAT is charged on almost all UK products, but it differs from other taxes because companies collect it on behalf of HMRC rather than the Government collecting it directly.

The standard rate charged on the supply of goods and services is 20%.

You generally need to register for VAT if your company’s VAT-taxable turnover goes over £90,000 in a rolling 12-month period. You must also register if you expect your taxable turnover to exceed £90,000 in the next 30 days alone.

You can choose to register voluntarily if your taxable turnover is below the threshold.

If you register for VAT, your company may be able to reclaim VAT incurred on qualifying business purchases, subject to the normal input VAT rules. In some cases, there is also a certain ‘kudos’ to being a VAT-registered business.

There are several government VAT schemes. The ‘standard’ method means you calculate VAT on each transaction. If you are eligible, you can apply a flat rate to your turnover – different rates apply according to the type of industry you operate in.

Which method you use will largely depend on the type of business you run.

VAT laws are complex, and HMRC has in-depth guides on registering and working out exactly how much you need to pay.

An accountant can analyse your financial profile and suggest an appropriate VAT scheme to register for.

3. National Insurance (NI)

National Insurance Contributions (NICs) are paid on employees’ salaries (not dividend income).

The employer deducts employees’ NICs from their pay and pays them to HMRC, together with any employer NICs due.

Both employers and employees can pay Class 1 NICs once earnings exceed the relevant thresholds. You can check the 2026/27 rates and thresholds on GOV.UK.

Employers NI

For 2026/27, Class 1 Employers’ NICs apply above the Secondary Threshold (£5,000).

• 15% on salaries over £5,000 per year.

If your company is eligible, up to £10,500 of Employers’ NICs can be covered by the Employment Allowance. However, a company where the only employee liable for employer NIC is a single director generally cannot claim the allowance.

Employees NI

For 2026/27, Class 1 Employees’ NICs apply above the Primary Threshold (£12,570).

• 8% on salaries between £12,570 and £50,270.
• 2% on income over £50,270.

4. Income Tax (for directors and employees)

For 2026/27, the personal allowance is £12,570 – this is the amount of income you can earn tax-free, although the allowance is reduced for people with adjusted net income over £100,000.

Above this, all employees and any directors who receive a salary must pay income tax at rates that vary with their overall annual income.

For England, Wales and Northern Ireland, the current tax bands are basic (20%), higher (40%), and additional (45%) if you earn £125,140 or more. Different income tax rates and bands apply in Scotland.

Many company owners choose to pay themselves small salaries – which attract minimal levels of income tax and National Insurance. They receive most of their income as dividends (see below).

You can view the current income tax rates here.

5. Dividend Tax (for shareholders)

You must pay tax on any taxable dividends you receive during each tax year.

The current rates are 10.75% (basic), 35.75% (higher), and 39.35% (additional), depending on the income tax band your dividends fall into. See the table below.

Income Tax Band	2026/27 taxable income band	Dividend Tax Rate
Basic	Up to £37,700	10.75% (up from 8.75%)
Higher	£37,701 – £125,140	35.75% (up from 33.75%)
Additional	Over £125,140	39.35%

These figures refer to taxable income after the Personal Allowance, where the full allowance is available. The Personal Allowance is gradually withdrawn once adjusted net income exceeds £100,000 and is completely lost at £125,140.

You should note that the first £500 of dividends are included within a so-called dividend allowance, and are taxed at 0%.

However, your overall income is not reduced by £500 for tax purposes – a strange and confusing quirk in the tax system.

Don’t forget, you also get a personal allowance of £12,570 (2026/27), if you are entitled to the full amount.

• Use our dividend calculator to work out your tax liability for any combination of salary plus dividends.
• You generally pay any dividend tax you owe via Self Assessment, although HMRC may sometimes collect smaller amounts in other ways.
• Read more on the GOV.UK guide to dividend tax.

Other types of tax

Alongside these main taxes, you may also be liable to pay several other taxes, including:

• Capital Gains Tax (CGT) and Business Asset Disposal Relief
• Stamp Duty or other transaction taxes, depending on your business activities.

What can an accountant do for you?

When you first set up a limited company, your obligations as a company director may seem very demanding, particularly when understanding tax and keeping on top of your accounting paperwork.

We highly recommend hiring an accountant who can handle all your tax matters and ensure you submit your paperwork and pay your company tax liabilities on time.