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 tradership, 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.

1. Corporation Tax (CT)

When you incorporate a new company, you must register with HMRC for Corporation Tax (CT) within 3 months of starting up.

If you form your company directly via Companies House, your company is automatically registered.

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 – profits are taxed between 19% and 25% – with a marginal rate between £50,000 and £250,000.

 

Annual Profits	2023/24 & 2024/25	2022/23
up to £50,000	19%	19%
£50,001 - £250,000	26.5%	19%
over £250,000	25%	19%

You can view CT rates going back to 1971 here.

2. Value Added Tax (VAT)

VAT is charged on almost all UK products but is different from other taxes as the company collects 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%.

If your company’s annual turnover is less than £85,000, you don’t need to worry about VAT, although you can choose to register if you wish.

For those companies with turnover greater than £85,000, registering for VAT is compulsory.

If you do register for VAT, there are benefits to your company as it allows you to deduct the cost of any VAT your business incurs via day-to-day expenses. 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.

Deciding which method to take will depend largely on the type of business you run.

VAT laws are quite 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 NICs during the payroll process and pays them directly to HMRC monthly or quarterly.

Both employers and employees pay Class 1 NICs on income above the current thresholds.

Employers NI

For 2024/5, Class 1 Employers’ NICs apply above the Secondary Threshold (£9,100).

• 13.8% on salaries over £9,100 per year.

If your company is eligible, the first £5,000 of Employers’ NICs can be written off, thanks to the Employment Allowance.

Employees NI

For 2024/5, Class 1 Employee’s 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 2024/25, the personal allowance is £12,570 – this is the amount of income you can earn tax-free.

Above this, all employees and any directors taking a salary must pay varying income tax rates depending on their overall annual income.

The current tax bands are basic (20%), higher (40%), and additional (45%) if you earn £125,140 or more.

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

You can view the current income tax rates here.

5. Dividend Tax (for shareholders)

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

The current rates are 8.25% (basic), 33.75% (higher) and 39.35% (additional), depending on which income tax band your dividends fall into – see the table below.

 

Income Tax Band	2023/24 & 2024/25	Dividend Tax Rate
Basic	£0 - £37,700	8.25%
Higher	£37,701 - £125,140	33.75%
Additional	£125,140 or more	39.35%

You should note that the first £500 of dividends are included within a so-called dividend allowance, and are not taxable.

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 (2024/5). These dividend tax bands apply to any income you receive after the personal allowance has been taken into account.

• Use our dividend calculator to work out your tax liability for any combination of salary plus dividends.
• You pay any dividend tax you owe via self assessment.
• 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)
• Business Asset Disposal Relief (aka Entrepreneurs’ Relief)
• Stamp Duty, 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 you hire an accountant who will be able to take care of all your tax concerns and make sure you submit your paperwork and pay your company tax liabilities on time.