Limited company tax: A complete guide for UK small business directors

Published Friday 21 August 2026

Table of contents

• What taxes does a limited company pay?
• Corporation Tax
• VAT for limited companies
• PAYE and Income Tax for directors
• National Insurance contributions
• Dividend tax for directors and shareholders
• Other taxes to be aware of
• Key tax deadlines for limited companies
• Making Tax Digital and your limited company
• Common mistakes to avoid with limited company tax
• Simplify limited company tax with Xero
• FAQs on limited company tax

Key takeaways

• UK limited companies pay Corporation Tax on profits at rates between 19% and 25%, depending on profit level, and must file a Company Tax Return within 12 months of the accounting period end.
• Directors pay personal Income Tax on salary through PAYE and dividend tax at separate rates, so choosing the right mix of salary and dividends can reduce your overall tax bill.
• VAT registration is compulsory once your taxable turnover exceeds £90,000 in any 12-month period, and Making Tax Digital means you'll need compatible software to file VAT returns.
• Employers must pay National Insurance on staff and director salaries above the £5,000 threshold, though the Employment Allowance can offset up to £10,500 of this cost.

What taxes does a limited company pay?

A UK limited company faces six main tax obligations: Corporation Tax on profits, VAT on sales above the threshold, PAYE and Income Tax on salaries, National Insurance on employment costs, dividend tax for shareholders, and potentially Capital Gains Tax on asset disposals. Understanding each of these helps you plan ahead and avoid unexpected bills.

If you're a small business director, limited company tax can feel overwhelming at first. The good news is that each obligation follows a clear set of rules and deadlines. Once you know what's due and when, staying on top of your tax becomes much more manageable.

This guide breaks down every tax your limited company needs to handle in the 2026/27 tax year. You'll find current rates, thresholds, payment deadlines and practical tips to help you stay compliant.

Corporation Tax

Corporation Tax is the tax your limited company pays on its profits. UK limited companies pay Corporation Tax at rates between 19% and 25%, depending on their annual profits.

Current Corporation Tax rates (2026/27)

The rate you pay depends on how much taxable profit your company makes in the accounting period.

• Small profits rate: 19% on profits of £50,000 or less.
• Main rate: 25% on profits of £250,000 or more.
• Marginal Relief: An effective rate between 19% and 25% for profits between £50,000 and £250,000.

If your company has associated companies, the profit thresholds are divided between them. For example, if you have two associated companies, the small profits threshold drops to £25,000 each.

What counts as taxable profit?

Taxable profit includes all the income and gains your company earns. This covers several categories of earnings:

• trading income from your normal business activities
• investment income, such as interest on savings or rental income
• chargeable gains from selling company assets at a profit

You can reduce your taxable profit by deducting allowable business expenses. These include staff costs, office rent, business travel, professional subscriptions, accountancy fees and the cost of goods you sell.

The key test is that the expense must be incurred wholly and exclusively for the purposes of the business.

How to register and pay Corporation Tax

You must register your company for Corporation Tax with HMRC within three months of starting to trade. You can do this online through the HMRC website.

Once registered, you'll need to file a Company Tax Return (CT600) within 12 months of the end of your accounting period. This return details your company's income, expenses and tax calculation.

The payment deadline is different from the filing deadline. You must pay your Corporation Tax bill nine months and one day after your accounting period ends. For example, if your accounting period ends on 31 March 2027, payment is due by 1 January 2028.

Late payment attracts interest from the day after the deadline. Late filing brings a flat £100 penalty, rising to £200 if the return is more than three months late, with further penalties and tax estimates for longer delays. You can learn more in this corporation tax guide.

VAT for limited companies

You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period. VAT is charged on most goods and services your company sells, and you can reclaim VAT on eligible business purchases.

When you must register for VAT

Compulsory registration applies when your taxable turnover goes above the £90,000 threshold. You must register within 30 days of the end of the month in which you crossed the threshold.

You can also register voluntarily if your turnover is below £90,000. Voluntary registration lets you reclaim VAT on business purchases, which can be worthwhile if you sell mainly to VAT-registered businesses. However, it does add admin, so weigh the benefit against the extra record-keeping.

VAT rates and schemes

Most goods and services attract the standard rate of 20%. Some items qualify for the reduced rate of 5% (for example, children's car seats and home energy), while others are zero-rated (for example, most food and children's clothing).

If your taxable turnover is below £150,000, you may be able to use the Flat Rate Scheme. This simplifies your VAT accounting by letting you pay a fixed percentage of your gross turnover to HMRC, rather than calculating VAT on every transaction. The percentage varies by industry.

Cash accounting is another option for businesses with turnover below £1.35 million. Under this scheme, you only account for VAT when you receive or make payments, rather than when you issue or receive invoices. This can help with cash flow if your customers are slow to pay.

VAT returns and Making Tax Digital

You must file VAT returns quarterly and pay any VAT you owe by the deadline shown on your return. Most businesses now use the annual accounting scheme or standard quarterly returns.

Under Making Tax Digital (MTD) for VAT, you must keep digital records and submit your VAT returns using MTD-compatible software. This applies to all VAT-registered businesses, regardless of turnover. You can't use manual spreadsheets alone to file your return; the data must flow digitally from your records to HMRC.

PAYE and Income Tax for directors

If you pay yourself a salary from your limited company, you'll need to set up PAYE and report to HMRC in real time. PAYE (Pay As You Earn) is the system HMRC uses to collect Income Tax and National Insurance from employment income.

Setting up PAYE as an employer

You must register as an employer with HMRC before your first payday. Registration can take up to five working days, so plan ahead.

Once registered, you'll need to report each payment to HMRC through Real Time Information (RTI). This means submitting a Full Payment Submission (FPS) on or before every payday, detailing each employee's pay, tax and National Insurance deductions. If you miss a submission, you may face a late filing penalty.

Director's salary and Income Tax

As a director, you have a Personal Allowance of £12,570 for the 2026/27 tax year. You don't pay Income Tax on earnings up to this amount.

Above the Personal Allowance, Income Tax is charged at three rates:

• Basic rate: 20% on income from £12,571 to £50,270.
• Higher rate: 40% on income from £50,271 to £125,140.
• Additional rate: 45% on income above £125,140.

Many directors choose to set their salary at or just below the National Insurance threshold to minimise the combined tax and NI cost. The exact tax-efficient salary level depends on your personal circumstances, but a common approach is to pay a salary around the Primary Threshold (£12,570 for 2026/27) and take remaining profits as dividends.

PAYE deadlines and payments

You must pay HMRC the Income Tax and National Insurance you've deducted from salaries. Monthly payments are due by the 22nd of the following month (or the 19th if paying by cheque). Small employers with a quarterly bill of less than £1,500 can pay quarterly instead.

At the end of the tax year (5 April), you'll need to submit a final FPS and file any required reports. This includes issuing P60 certificates to each employee and reporting benefits in kind on form P11D by 6 July.

National Insurance contributions

As an employer, your limited company pays National Insurance on salaries above certain thresholds, and you may also owe contributions as a director. National Insurance funds state benefits including the State Pension and statutory sick pay.

Employers' National Insurance

Your company pays Employers' National Insurance (Class 1 secondary) at 15% on earnings above the secondary threshold of £5,000 per year (from April 2025). This is an additional cost on top of the salary you pay.

The Employment Allowance can reduce your Employers' NI bill by up to £10,500 per year. Most small businesses qualify, but you can't claim it if you're the sole employee and also a director. If you have other employees alongside yourself, you can usually claim.

Employees' and directors' National Insurance

Employees pay Class 1 National Insurance at 8% on earnings above the Primary Threshold (£12,570 for 2026/27). You deduct this from their pay through PAYE.

Directors have a special calculation method. HMRC allows a directors' annual earnings period, which means NI is worked out on total annual earnings rather than each pay period. This prevents overpayment of NI when a director's pay fluctuates throughout the year.

If your company provides benefits in kind to employees or directors, such as private medical insurance or a company car, you'll also owe Class 1A National Insurance at 15% on the taxable value of those benefits. You report these on form P11D and pay the Class 1A NI by 22 July after the end of the tax year.

Dividend tax for directors and shareholders

Dividends you take from your limited company are taxed at lower rates than salary, making them a tax-efficient way to extract profits. However, dividends can only be paid from retained profits after Corporation Tax.

How dividends are taxed

Every individual gets a £500 tax-free dividend allowance for the 2026/27 tax year. Dividends above this allowance are taxed at rates that depend on your Income Tax band. You can find the current rates in this dividend tax rates guide.

• Basic rate: 10.75% on dividend income within the basic rate band.
• Higher rate: 35.75% on dividend income within the higher rate band.
• Additional rate: 39.35% on dividend income above £125,140.

Your dividend income sits on top of your other taxable income. So if your salary already uses up your basic rate band, your dividends will fall into the higher rate band.

Your company can only pay dividends from retained profits. This means the company must have enough profit left over after paying Corporation Tax and covering its liabilities. Before declaring a dividend, you should prepare interim or annual accounts to confirm sufficient retained profits exist.

Salary vs dividends: A tax-efficient approach

Most directors of small limited companies take a combination of a modest salary and dividends. This approach can reduce your overall tax bill compared to taking all your income as salary.

Here's a worked example for the 2026/27 tax year. Assume your company has £80,000 in pre-tax profits and you're the sole director with no other income.

1. Pay a salary of £12,570 (the Personal Allowance)

• Income Tax on salary: £0 (within Personal Allowance)
• Employee's NI on salary: £0 (at or below Primary Threshold)
• Employer's NI: 15% on £7,570 (salary above the £5,000 secondary threshold) = £1,136

2. Calculate remaining profits after salary and Employer's NI

• Company profit after salary and Employer's NI: £80,000 minus £12,570 minus £1,136 = £66,294
• Corporation Tax at 19% (small profits rate): £12,596
• Retained profit available for dividends: £53,698

3. Take the remaining profit as dividends

• First £500: Tax-free (dividend allowance)
• Next £37,200 (filling the basic rate band up to £50,270, minus £12,570 salary): Taxed at 10.75% = £3,999
• Remaining £15,998: Taxed at 35.75% = £5,719

Total tax paid:

• Corporation Tax: £12,596
• Employer's NI: £1,136
• Dividend tax: £9,718
• Total: £23,450 on £80,000 profit (effective rate of around 29%)

If you took the full £80,000 as salary instead, you'd pay significantly more in Income Tax and National Insurance. The salary-plus-dividends approach can save thousands of pounds each year.

You must report dividend income above the £500 allowance through Self Assessment. Your tax return is due by 31 January following the end of the tax year.

Other taxes to be aware of

Beyond the main obligations, a few other taxes may apply to your limited company depending on your activities. These are less common for small businesses but worth understanding.

Capital Gains Tax

When your company sells or disposes of an asset for more than it cost, the profit (chargeable gain) is subject to Corporation Tax, not a separate Capital Gains Tax. However, as a director and shareholder, if you sell your shares or close your company, you may face personal Capital Gains Tax.

Business Asset Disposal Relief (formerly Entrepreneurs' Relief) can reduce the tax rate on qualifying gains to 10%, up to a lifetime limit of £1 million. To qualify, you generally need to have been a director and held at least 5% of shares for two years before the disposal.

Annual Investment Allowance

The Annual Investment Allowance (AIA) lets your company deduct the full cost of qualifying plant and machinery up to £1 million per year from its taxable profits. This includes equipment, commercial vehicles, office furniture and certain fixtures.

Claiming AIA reduces your Corporation Tax bill in the year you buy the asset. For example, if you spend £50,000 on new equipment and your company pays the 19% small profits rate, you'd save £9,500 in Corporation Tax.

Business rates and other levies

If your company occupies business premises, you may need to pay business rates to your local authority. Small businesses may qualify for relief, including Small Business Rate Relief of up to 100% for properties with a rateable value below £12,000.

Other taxes that may occasionally apply include Stamp Duty Land Tax on property purchases, Insurance Premium Tax on business insurance, and Climate Change Levy on energy use for larger businesses.

Key tax deadlines for limited companies

Staying on top of deadlines is one of the most important parts of managing your limited company tax. Missing a deadline can result in penalties, interest charges and unnecessary stress.

Here are the key deadlines to track throughout the year.

• Corporation Tax payment: nine months and one day after your accounting period ends
• Company Tax Return (CT600): 12 months after your accounting period ends
• PAYE payments: by the 22nd of each month (or quarterly if your average monthly bill is under £1,500)
• VAT returns: quarterly, with the deadline shown on each return (usually one month and seven days after the quarter ends)
• Self Assessment tax return: 31 January following the end of the tax year (for directors with dividend income)
• Companies House annual accounts: nine months after your financial year ends
• Confirmation Statement: at least once every 12 months, with a 14-day filing window

Setting up reminders or using accounting software to track these dates helps you avoid late filing penalties. HMRC charges penalties for late Corporation Tax returns starting at £100, and late VAT returns may trigger a surcharge or penalty points under the new system.

Making Tax Digital and your limited company

Making Tax Digital (MTD) is HMRC's programme to move tax administration online. If your limited company is VAT-registered, MTD already affects how you file your VAT returns. Further changes for Income Tax are on the way.

Under MTD for VAT, you must keep digital records of all your transactions and submit VAT returns using MTD-compatible software. Manually typing figures into HMRC's website no longer counts. Your records need to flow digitally from your bookkeeping software to HMRC.

MTD for Income Tax Self Assessment (MTD for ITSA) is being phased in for self-employed individuals and landlords with income above £50,000 from April 2026, with the threshold dropping to £30,000 from April 2027. While this doesn't directly affect your limited company, it may affect you personally if you have self-employment or property income alongside your director role.

Choosing MTD-compatible accounting software now means you'll be prepared for current and future requirements. Good software automates your record-keeping, reduces errors and makes filing straightforward.

Common mistakes to avoid with limited company tax

Even experienced directors can slip up with their tax obligations. Knowing the most common pitfalls helps you steer clear of costly errors.

• Missing Corporation Tax payment deadlines: HMRC charges interest from the day after the deadline, and repeated late payments can lead to penalties. Set up a reminder well before the nine-month mark.
• Not registering for VAT when required: If your taxable turnover exceeds £90,000, you must register within 30 days. HMRC can backdate your registration and charge the VAT you should have collected.
• Mixing personal and business expenses: Putting personal spending through your company can lead to a benefit-in-kind tax charge or even an HMRC investigation. Keep personal and business finances separate.
• Failing to claim allowable expenses: Many directors miss out on legitimate deductions such as home office costs, professional subscriptions and business travel. Claiming these reduces your Corporation Tax bill.
• Poor record-keeping under MTD: With digital record-keeping now required for VAT, incomplete or disorganised records can lead to errors on your returns and potential penalties from HMRC.

Simplify limited company tax with Xero

Managing multiple tax obligations doesn't have to be complicated. Xero's cloud accounting software helps you track Corporation Tax liabilities, manage PAYE, handle VAT returns and keep your records MTD-compliant, all in one place.

With automated bank feeds, real-time reporting and built-in tax tools, you can stay on top of every deadline without the manual spreadsheet work. Xero connects to HMRC for MTD-compatible VAT filing and can help you see your tax position throughout the year.

Whether you handle your own accounts or work with an accountant, Xero makes limited company tax simpler to manage, so get one month free and see how it works for your business.

FAQs on limited company tax

Here are answers to some of the most common questions directors have about limited company tax.

How much tax does a limited company pay in the UK?

A UK limited company pays Corporation Tax at 19% on profits up to £50,000 and 25% on profits over £250,000, with Marginal Relief for profits in between. Directors also pay personal tax on salary and dividends they take from the company.

Do I need to pay tax on dividends from my limited company?

Yes. You get a £500 tax-free dividend allowance, but dividends above that are taxed at 10.75% (basic rate), 35.75% (higher rate) or 39.35% (additional rate). You report dividend income through Self Assessment.

When do I need to register for VAT?

You must register for VAT when your taxable turnover exceeds £90,000 in any rolling 12-month period. You can also register voluntarily below this threshold if it benefits your business.

Can I pay myself a salary and dividends from my limited company?

Yes, and most directors do. Taking a salary up to the Personal Allowance (£12,570) and extracting further profits as dividends is generally more tax-efficient than taking a high salary, because dividend tax rates are lower than combined Income Tax and National Insurance rates.

What happens if I miss a Corporation Tax deadline?

Late payment of Corporation Tax attracts interest from the day after the deadline. Late filing of your Company Tax Return triggers an automatic £100 penalty, rising to £200 after three months, with further daily penalties and tax-based penalties for returns more than six months late.