The Complete Guide to Limited Company Tax for Directors

Running a limited company brings genuine tax advantages over being a sole trader, but it also brings its own set of decisions — how much to pay yourself in salary versus dividends, what counts as a director's loan, and where IR35 fits in if you contract through your company. This guide pulls the key decisions together. For deadlines and typical accountant costs, see our complete tax accountant guide — or jump straight to Limited Company Accounts support or register your enquiry whenever you're ready.

Sole Trader vs Limited Company: Should You Incorporate?

Neither structure is universally better — it depends on your profit level, how much administration you're willing to take on, and how much you value the liability protection a company provides.

As profit grows, the tax advantage of a company — paying Corporation Tax on profit, then choosing when and how to extract it — usually becomes more meaningful, since a sole trader pays Income Tax and Class 4 National Insurance on the full amount as it's earned regardless of whether they need to draw it all out personally. There's no single profit level at which incorporating suddenly becomes “worth it” — it depends on your circumstances — but it's a comparison worth actually running rather than guessing at. Our Salary vs Dividend Calculator shows how a given amount of company profit splits between Corporation Tax, National Insurance and personal tax depending on the salary you choose, which is a useful starting point before a proper conversation with a professional.

Setting Up Your Company

• Choose a company name and check it isn't already taken or too similar to an existing one.
• Register (“incorporate”) with Companies House, appointing at least one director and confirming your shareholders.
• Register separately for Corporation Tax with HMRC, usually within 3 months of starting to trade.
• Open a business bank account — keeping company money separate from personal money from day one avoids a lot of confusion later.
• Decide your company's accounting reference date (its financial year end), which Companies House sets by default but you can change.

None of this is particularly complicated on its own, but getting the early decisions right — particularly around shareholdings if more than one person is involved — is much easier than unpicking them later. A Limited Company Accounts specialist can set this up correctly from the start.

Ongoing Filing Obligations, Briefly

Once trading, a limited company has several recurring filings — annual accounts and a confirmation statement with Companies House, and a Corporation Tax return with HMRC. Our complete tax accountant guide covers the exact deadlines for each in detail, so this guide won't repeat them here.

One thing worth flagging: being a director doesn't automatically mean you need to file your own personal Self Assessment return — HMRC's position on this has shifted over the years, and it now generally depends on your actual income (for example, receiving dividends or having untaxed income), not simply holding the title of director. It's worth confirming your specific position rather than assuming either way.

Salary vs Dividends: How Directors Actually Get Paid

Most director-shareholders pay themselves through a combination of a small salary and dividends, rather than one or the other exclusively, because the two are taxed quite differently.

A common approach is to pay a salary around the point where it stops costing more in employer National Insurance than it saves in Corporation Tax — which depends heavily on whether your company can claim Employment Allowance (broadly, most single-director companies with no other staff can't) — and take further income as dividends. This is exactly the trade-off our Salary vs Dividend Calculator is built to show: enter your company's profit and a salary figure, and it breaks down the Corporation Tax, National Insurance, Income Tax and dividend tax involved.

One important rule: dividends can only legally be paid out of retained (distributable) profit, not simply because there's cash sitting in the business bank account. Paying an “illegal dividend” when the company hasn't actually made sufficient profit can create real problems later, so it's worth checking your company's position before declaring one, particularly partway through the year.

Director's Loans: What They Are and Why They Matter

A director's loan account simply tracks money taken out of (or put into) the company that isn't salary, dividends, or a repayment of a business expense. It's common for this to happen without anyone intending to create a “loan” — drawing money to cover a personal bill and squaring it up later is enough to count.

• If you owe the company money at your year end and don't repay it within 9 months, the company generally has to pay an additional Corporation Tax charge (often referred to as “section 455 tax”) on the outstanding amount.
• Larger overdrawn loans can also trigger a benefit-in-kind charge on you personally, treated similarly to receiving cheap or interest-free credit.
• The section 455 tax is refundable once the loan is properly repaid, but reclaiming it can take time, so it's better avoided than fixed after the fact.
• Keeping a clear, up-to-date record of what's been drawn and why makes it far easier to stay on top of this, rather than reconstructing it at year end.

Corporation Tax Reliefs Worth Knowing About

Beyond the headline rate, a few reliefs and allowances can genuinely reduce what a company owes, and they're easy to miss if nobody flags them.

Capital allowances

Money spent on qualifying equipment — computers, machinery, certain vehicles — can often be deducted from profit through capital allowances, including the Annual Investment Allowance, which allows a large proportion of qualifying spending to be deducted in full in the year it's incurred rather than spread out.

Employer pension contributions

A company can generally make pension contributions directly on a director's behalf. These are usually deductible as a business expense, and unlike salary, they don't trigger employer or employee National Insurance, or Income Tax at the point of contribution — making this one of the more tax-efficient ways to extract value from a company for directors who don't need the money immediately.

R&D tax relief

Companies genuinely developing new products, processes or software may qualify for R&D tax relief, which can meaningfully reduce a Corporation Tax bill or, for some loss-making companies, generate a cash credit. The qualifying criteria are specific, so this is worth discussing directly with a professional rather than assuming it does or doesn't apply.

IR35 and Off-Payroll Working

If you contract your services through your own limited company, particularly common among consultants and professionals in areas like Canary Wharf and Cockfosters, IR35 is likely to come up sooner or later.

In simple terms, IR35 (the off-payroll working rules) exists to stop someone effectively working as an employee from paying less tax simply by operating through a company. If a contract is judged to be “inside IR35”, the income from it is broadly taxed as if it were employment income, even though it's paid to your company. If it's “outside IR35”, the usual company salary-and-dividend approach applies.

Since April 2021, medium and large private-sector clients are generally responsible for deciding your IR35 status themselves, rather than leaving it to your own company as was previously the case; smaller clients are a common exception, where the responsibility can still sit with your company. Getting this wrong isn't usually about dishonesty — contract wording and actual working practices are both relevant, and it's a genuinely fact-specific judgement. If you're not sure where you stand, that's exactly the kind of question worth raising with a tax adviser rather than guessing.

Closing or Selling a Company

Eventually, some companies stop trading, whether through retirement, a change in circumstances, or simply moving on to something else. How this is handled affects both timing and tax treatment.

• A company with minimal remaining assets can often be struck off (dissolved) relatively simply, though there are rules about distributing any remaining funds beforehand.
• A company with more significant retained profit is often wound up through a Members' Voluntary Liquidation (MVL), which can allow funds to be extracted as a capital gain rather than as dividend income — potentially at a lower rate, particularly where Business Asset Disposal Relief applies.
• Anti-avoidance rules exist to prevent someone repeatedly closing and reopening a similar company purely to access capital treatment (sometimes called “phoenixing”), so this isn't a strategy to use casually or repeatedly.
• Whichever route applies, outstanding filings, tax liabilities and director's loan balances generally need to be resolved before the process can complete cleanly.

Common Limited Company Mistakes We See

• Mixing personal and business spending through the same account, which makes it far harder to keep clean records.
• Assuming being a director never requires personal Self Assessment, when this depends on your actual income, not your job title.
• Declaring dividends without checking there's enough distributable profit to legally support them.
• Not setting aside cash for Corporation Tax as profit is earned, then finding the bill harder to cover once it's actually due.
• Letting a director's loan account run for months without tracking it, then being surprised by a section 455 tax charge at year end.
• Forgetting the confirmation statement, which is separate from annual accounts and easy to overlook since it doesn't involve any numbers.

Find Limited Company Tax Help by Location

Limited company and contractor enquiries come up across the areas we cover — a few places where this is a particularly common type of enquiry:

• Canary Wharf — contractors and consultants, including IR35 questions
• Cockfosters — consultants and small company directors, often alongside dividend or investment income
• Southgate — contractors and consultants running their own limited company
• London — from newly formed companies through to established limited company clients
• Manchester — a growing base of newly formed companies across sectors

Wherever you're based, tell us your postcode or town when you register an enquiry — see our full list of locations for more.

Frequently Asked Questions

A few more common questions from directors — see our full FAQ page for more, or get in touch directly if yours isn't covered here.