In one paragraph: a UK Limited company pays Corporation Tax at 19% on profits up to £50,000, 25% above £250,000, and an effective 26.5% marginal rate in between (with marginal relief). Director-shareholders typically extract via small salary (£12,570) + dividends (taxed at 10.75/35.75/39.35%) + employer pension contributions (most tax-efficient at higher profit levels). Closure via MVL with Business Asset Disposal Relief gives the lowest exit tax — 14% (rising to 18% from April 2026) on lifetime gains up to £1m.
Corporation Tax for 2026/27
| Profit band | Rate |
|---|---|
| £0 - £50,000 (small profits) | 19% |
| £50,001 - £250,000 (marginal relief) | ~26.5% effective |
| £250,001+ (main rate) | 25% |
Associated companies share the bands. Two companies = each gets £25k SP limit and £125k upper limit. Associated companies explained.
Close Investment Companies (mostly-investment small companies) pay 25% on all profits regardless of size. CIC explained.
The director extraction decision
For most owner-directors, the optimal 2026/27 extraction structure is:
- Salary £12,570: uses the full Personal Allowance, builds State Pension NI credits. Employer NI cost £1,136. Net cost after CT deduction: ~£11,100.
- Dividends up to the basic-rate threshold (£37,700 above PA = £50,270 total income): taxed at 10.75% after £500 dividend allowance. Cheap and efficient.
- Above £100,000 personal income: STOP. PA taper (60% effective rate) kicks in. Switch to pension contributions.
- Above £125,140: stop dividends; switch entirely to employer pension contributions. Additional-rate dividend tax at 39.35% combined with CT means ~50%+ total tax leakage.
Full mechanics: Optimal extraction by profit level.
Employer pension contributions — the highest-leverage extraction
A pension contribution from your own company is:
- Deductible against Corporation Tax (saves 19-25%)
- No Income Tax to you
- No National Insurance to either you or the company
- Subject to the £60,000 annual allowance (with carry-forward of 3 prior years' unused)
Net cost of getting £100 into your pension via the company: about £75. Compare to extracting via dividend (~£55-60 net of CT and dividend tax for higher-rate payers) or salary (~£40-50 net of all taxes).
Full mechanics: Employer pension contributions explained.
Director's Loan Accounts (DLAs)
Any money flowing between you and the company outside formal salary, dividend, or expense reimbursement goes through the DLA. Get it overdrawn (you owe company) and three rules apply:
- Section 455 tax at 35.75% if not repaid within 9 months 1 day of year-end (refundable when repaid)
- Beneficial loan benefit-in-kind above £10,000 outstanding, taxed at HMRC official rate (3.75% in 2026/27)
- 30-day bed-and-breakfast rule blocks tax avoidance via short repayment/re-borrowing cycles
Full mechanics: DLAs explained.
Closing the company — BADR and MVL
Two routes to close:
- Voluntary strike-off (DS01): £44 fee plus accountant costs. Capital distribution capped at £25,000 — above that, all distributions reclassified as dividends.
- Members' Voluntary Liquidation (MVL): £2,000-£5,000 cost. Unlimited capital distribution. With BADR, taxed at 14% (rising to 18% from April 2026), up to £1m lifetime cap.
Crossover: above ~£35-40k of retained reserves, MVL becomes cheaper despite the higher fees.
Anti-avoidance: continuing a "similar trade" within 2 years can claw back the MVL tax savings under the phoenixing TAAR.
Full mechanics: Strike-off vs MVL and Business Asset Disposal Relief.
Anti-avoidance traps to be aware of
- Settlements legislation: dividend waivers in favour of spouse or family can be reclassified as the waiver-giver's income. Dividend waivers explained.
- Close Investment Company (CIC): a company that ceases trading and holds investments pays 25% CT on everything, no marginal relief.
- Associated companies: two or more companies under common control share the CT bands.
- Phoenixing TAAR: winding up to extract tax-efficient capital and re-starting the same trade triggers re-classification.
- S455 on overdrawn DLAs: 35.75% tax payable if not repaid within 9 months 1 day of year-end.
Practical timing for the tax year
| Date | Action |
|---|---|
| April (start of tax year) | Set salary for the new year (most directors keep at £12,570) |
| Pre-March year-end | Final dividend decisions; clear overdrawn DLA if possible |
| End of accounting period | Finalise pension contributions (deductible against current CT) |
| 9 months after year-end | CT due date; S455 due date if any overdrawn DLA |
| End of January | Personal Self Assessment payment deadline |
Tools and deeper guides
- Salary vs dividend calculator
- Dividend tax calculator
- Optimal extraction by profit level
- Employer pension contributions
- Director's Loan Accounts
- Close Investment Companies
- Associated companies and CT bands
- Strike-off vs MVL on closure
- Business Asset Disposal Relief
- Dividend waivers and anti-avoidance
Sources
Salary vs dividend — a worked example (2026/27)
Here is the single-director, single-shareholder pattern most small companies follow: a £12,570 salary topped up with dividends. The salary equals the Personal Allowance and the National Insurance primary threshold, so the director pays no income tax and no employee NI on it, while the company gets a Corporation Tax deduction. Dividends are then paid from post-tax profit and taxed in the director's hands after the £500 dividend allowance.
| Step | Amount |
|---|---|
| Salary drawn (no income tax, no employee NI) | £12,570 |
| Dividend drawn to reach £50,270 total income | £37,700 |
| of which covered by £500 dividend allowance (0%) | £500 |
| taxed at the 10.75% basic dividend rate (× £37,200) | £3,999 |
| Personal tax on this package | £3,999 |
So a director drawing £50,270 keeps roughly £46,271 personally. Push further and the rates step up sharply: dividends in the higher-rate band are taxed at 35.75%, and once total income tops £125,140 the additional-rate dividend charge of 39.35% applies. Stacked on top of the Corporation Tax the company already paid to create the distributable profit, the combined leakage on higher-rate dividends is why employer pension contributions usually win above the basic-rate band — they avoid income tax, NI and the dividend rates entirely while still getting a Corporation Tax deduction.
A salary above the £12,570 mark is generally inefficient for a one-person company because the employee and employer NI cost outweighs the extra Corporation Tax relief — unless the company can use the Employment Allowance (below). Model your own split with the salary vs dividend calculator.
The £5,000 Employment Allowance
The Employment Allowance lets eligible employers reduce their employer (secondary) Class 1 National Insurance bill by up to £5,000 a year. It is claimed through payroll and offsets employer NI as it arises until the allowance is used up.
The crucial restriction for owner-managed companies: a company whose only employee paid above the secondary threshold is also a director cannot claim it. So the classic single-director company with no other staff is excluded. The allowance becomes available once there is a second properly-paid employee (for example a spouse genuinely working in the business, or the first hire), which can change the salary-vs-dividend maths — with the allowance covering the employer NI, paying a salary up to the full Personal Allowance, or beyond, can become worthwhile.
Other exclusions apply, including most companies doing more than half their work in the public sector. Always confirm eligibility before claiming, because an incorrect claim has to be repaid.
VAT registration for companies
Corporation Tax is not the only tax a growing company has to watch. You must register for VAT once VAT-taxable turnover exceeds £90,000 in any rolling 12-month period (the 2026/27 threshold), or if you expect to breach it in the next 30 days alone. Deregistration is possible once turnover falls below £88,000.
- The test is on a rolling 12 months, not your accounting year or the tax year — check it every month.
- Once registered, you charge 20% VAT on standard-rated sales, reclaim input VAT on purchases, and file under Making Tax Digital for VAT using compatible software.
- You can register voluntarily below the threshold — useful where your customers are themselves VAT-registered (they reclaim the VAT you charge) and you want to recover input VAT on your own costs.
- Some smaller companies use the VAT Flat Rate Scheme to simplify, though the limited-cost-trader rule blunts its benefit for low-cost service businesses.
The detail, including registration mechanics, sits on the VAT registration and MTD page.
Director responsibilities and filing deadlines
Running a company means meeting two separate sets of obligations — to Companies House (company law) and to HMRC (tax). Directors are personally responsible for these even if an accountant does the work.
| Filing | Goes to | Deadline |
|---|---|---|
| Annual accounts | Companies House | 9 months after the accounting period end |
| Company Tax Return (CT600) | HMRC | 12 months after the accounting period end |
| Corporation Tax payment | HMRC | 9 months and 1 day after period end |
| Confirmation statement | Companies House | At least once every 12 months |
| Payroll (RTI) + any VAT returns | HMRC | On or before each payday / quarterly |
Note the deadline quirk: Corporation Tax is payable before the CT600 that calculates it is due — payment falls at 9 months and 1 day, but the return itself is not due until 12 months. Large companies (profits over £1.5m) pay in quarterly instalments instead.
Beyond filing, directors' core legal duties under the Companies Act 2006 include acting within their powers, promoting the success of the company, exercising reasonable care and skill, avoiding conflicts of interest, and keeping accurate accounting records. Persistent late filing brings automatic penalties and, ultimately, the risk of being struck off or disqualified.
How UK Tax Drag holds itself to account
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