Limited company tax treatment works differently from tax for a sole trader because the company and the individual behind it are separate.

The company has its own profits, taxes, accounts and filing responsibilities. Meanwhile, the director or shareholder may also have personal tax to consider when money comes out of the company as salary, dividends or benefits.

That distinction is one of the most important things to understand if you run a limited company or are thinking about setting one up.

In this episode, we explain the company side, the personal side and how Corporation Tax, salary, dividends, National Insurance and filing deadlines fit together.

About this episode

Tax often forms part of the decision when choosing between operating as a sole trader and running a limited company.

However, the system becomes easier to follow once we separate the different layers.

With a limited company, there are usually two financial worlds to think about:

the company and its own tax position
the individual director or shareholder and their personal tax position

Those two worlds are connected, but they are not the same.

As a result, money earned by the company does not automatically become your personal money simply because you own the company.

A limited company is a separate legal entity

A limited company exists separately from its owners.

That means the company can earn income, incur expenses, own assets, owe money, pay tax and enter into contracts in its own name.

Meanwhile, a director runs the company and makes decisions on its behalf.

If the company is limited by shares, the owners are shareholders. A director can also be a shareholder, which is very common in small owner-managed businesses.

Companies limited by guarantee are different because they do not have shareholders in the same way.

Therefore, when we discuss dividends in this episode, that part applies to companies limited by shares.

“Companies are separate legal entities. They have their own obligations, their own responsibilities.”

How a limited company makes a profit

Let us use the example from the episode: Edwin’s Creative Studio Ltd.

Edwin’s company earns income by selling services and products. At the same time, it has business costs such as software, marketing, premises, freelancers, professional fees and salaries.

Broadly, income less allowable business costs gives us the starting point for the company’s profit.

However, accounting profit and taxable profit are not always identical because tax rules can adjust the accounting figures.

For a broader explanation, see our guide to understanding business profit.

Corporation Tax rates for limited companies

Corporation Tax is the main tax a limited company pays on its taxable profits.

For the current Corporation Tax regime:

19% is the small profits rate for companies with profits of £50,000 or less
25% is the main rate for companies with profits above £250,000
Marginal Relief can apply when profits fall between £50,000 and £250,000

Those £50,000 and £250,000 limits assume a normal 12-month accounting period and no associated companies.

For example, associated companies can reduce the thresholds.

Likewise, a shorter accounting period can reduce the limits proportionately.

Therefore, the headline percentages are useful for understanding the system, but the final Corporation Tax calculation depends on the company’s actual circumstances.

Allowable expenses and taxable profit

Business costs can reduce taxable profit when they meet the relevant Corporation Tax rules.

Typical costs may include commercial rent, advertising, accountancy fees, freelancer costs, employee salaries and business software.

However, not every payment automatically becomes a tax-deductible expense.

Instead, the treatment depends on what the cost is, why the company incurred it and the tax rules that apply.

For larger purchases such as equipment, capital allowances may also affect the tax calculation.

How directors take money from the company

The next layer is the individual.

A director may need money from the company to live on, but there are several ways that money can leave the company.

For example, a payment might be:

a salary through payroll
a dividend to a shareholder
reimbursement of a genuine business expense
a taxable benefit provided by the company
a director’s loan in the right circumstances

Each route has different tax and legal consequences.

As a result, money should not simply move from the company bank account without knowing what the payment represents.

Director salary and PAYE

If the company pays a director a salary, that salary normally goes through payroll.

Therefore, the company may need to register as an employer and operate PAYE.

PAYE is the system used to collect Income Tax and National Insurance from employment income.

Meanwhile, the salary can normally form part of the company’s employment costs when calculating taxable profit, subject to the usual tax rules.

However, there is no single magic salary that works for every director.

Other income, National Insurance, pensions, Employment Allowance eligibility and the company’s wider tax position can all affect the answer.

Employer National Insurance in 2026/27

A limited company may also have to pay employer National Insurance on salaries.

For the 2026/27 tax year, the standard employer Class 1 National Insurance rate is 15% on earnings above the relevant Secondary Threshold, which is £5,000 a year for a standard employee.

However, special categories and reliefs can change the calculation.

For example, Employment Allowance can reduce the employer National Insurance bill for eligible businesses.

Not every company qualifies, so salary planning should reflect the actual company rather than a standard figure copied from somebody else.

How dividends work

Dividends are different from salary.

A dividend is a distribution of company profit to shareholders.

Therefore, dividends only apply where there are shareholders, which is why the distinction between company types matters.

Importantly, dividends are not a business expense for Corporation Tax purposes.

First, the company calculates and pays Corporation Tax on its taxable profits.

Then, where sufficient distributable profits are available, the company may pay some of those profits to shareholders as dividends.

Dividends must also be properly declared and recorded.

So you cannot simply label any withdrawal as a dividend when there are not enough profits available to support it.

Dividend tax for 2026/27

The shareholder may then have personal tax to pay on dividends received.

For the 2026/27 tax year, the dividend allowance is £500.

Dividend income above the available allowance is taxed according to the individual’s tax band.

The current dividend rates are:

10.75% at the basic dividend rate
35.75% at the higher dividend rate
39.35% at the additional dividend rate

However, you cannot work out the correct rate by looking at the dividend in isolation.

Instead, the shareholder’s other income also affects which tax band the dividend falls into.

As a result, salary and dividend planning needs to look at the individual and the company together.

For more on wider tax planning, see our guide to tax efficiency and benefit planning.

How salary and dividends differ

Salary and dividends may both put money into the director’s hands, but they work differently.

A salary normally goes through payroll, may attract Income Tax and National Insurance, and can create employer National Insurance for the company. Subject to the usual rules, it may also reduce the company’s taxable profit.

Dividends, by contrast, go to shareholders from available company profits. They are not deductible for Corporation Tax, they do not attract National Insurance, and they may create personal dividend tax.

Therefore, the mix between salary and dividends can affect both the company and the individual.

However, tax should not be the only consideration.

Cash flow, company profitability, pensions, other income and the legal rules around distributions also matter.

Limited company filing and tax deadlines

A limited company has its own filing responsibilities.

For an established private limited company, the main deadlines normally include:

annual accounts: generally filed with Companies House within 9 months of the company’s financial year end
Corporation Tax payment: normally due 9 months and 1 day after the end of the Corporation Tax accounting period
Company Tax Return: normally due 12 months after the end of the accounting period

First accounts can follow different filing deadlines.

Also, very large companies can have different Corporation Tax payment rules.

Therefore, do not assume that every company follows exactly the same timetable.

One interesting feature is that the Corporation Tax payment deadline usually arrives before the Company Tax Return filing deadline.

As a result, it often makes sense to complete the accounts and tax work together rather than deliberately waiting to file the return later.

Why record keeping matters

Good records support nearly every part of limited company tax.

You need reliable information for sales, costs, payroll, assets, amounts owed, dividends, Corporation Tax and annual accounts.

In addition, good records help if HMRC asks questions about figures reported by the company.

More importantly, the records should help you understand what is happening in the business rather than existing purely for compliance.

“There is a legal obligation placed on your shoulders.”

Digital accounting systems can make record keeping easier when we use them properly.

If you are looking at Xero, see our guide to getting started with Xero accounting.

How limited company tax treatment fits together

The overall flow can be thought of in stages.

Income comes into the company. Sales and other taxable income form the starting point.
Allowable costs are considered. These help determine the taxable profit.
Corporation Tax is calculated. The company deals with its own tax liability.
A director may receive salary. Payroll and PAYE rules can apply.
Shareholders may receive dividends. Sufficient distributable profits must exist first.
Personal tax is considered separately. Salary, dividends and other income feed into the individual’s position.

Once we separate those steps, the system becomes much easier to understand.

FAQs

What tax does a limited company pay?

The main tax on company profits is Corporation Tax. Depending on its circumstances, a company may also have employer National Insurance, VAT or other tax obligations.

What is the Corporation Tax rate in 2026?

The small profits rate is 19% for profits of £50,000 or less, while the main rate is 25% for profits above £250,000. Marginal Relief can apply between those figures. Associated companies and short accounting periods can reduce the limits.

Can a director take a salary from the company?

Yes. A director can receive a salary, which normally goes through payroll. Income Tax and National Insurance may apply depending on the salary and the individual’s circumstances.

Are directors allowed to take dividends?

A director who is also a shareholder may receive dividends if the company has sufficient profits available for distribution and follows the correct dividend procedures.

Are dividends a business expense?

No. Dividends are distributions of profit to shareholders and are not deducted as a business expense when calculating Corporation Tax.

How much is the dividend allowance for 2026/27?

The dividend allowance is £500. Dividend income above the allowance may be taxed at 10.75%, 35.75% or 39.35% depending on the individual’s tax band.

How soon must Corporation Tax be paid?

For most companies, Corporation Tax is normally due 9 months and 1 day after the end of the relevant accounting period. Different payment rules can apply to large companies.

What is the Company Tax Return deadline?

The Company Tax Return is normally due 12 months after the end of the accounting period it covers.

How long does a private company have to file annual accounts?

For an established private company, annual accounts are generally due 9 months after the company’s financial year ends. First accounts can follow different deadlines.

Episode Timecodes

Choosing between sole trader and limited company – 00:00
What a limited company is – 00:43
Companies limited by shares and guarantee – 01:03
Company income, expenses, salary and dividends – 02:09
Corporation Tax and employer National Insurance – 02:56
Calculating company profits – 03:38
Corporation Tax rates and Marginal Relief – 04:28
Example company profit calculation – 05:17
PAYE and director salary – 05:39
Employer National Insurance – 06:13
When dividends apply – 07:11
Dividends and company profits – 07:29
Personal tax on dividends – 08:15
Why professional advice may help – 09:03
Company responsibilities and deadlines – 09:20
Accounts, Corporation Tax and CT600 deadlines – 09:37
Record keeping for limited companies – 10:38
Digital accounting and final takeaway – 11:18

Related episodes and guides

Key takeaway

Limited company tax treatment becomes easier to understand once you separate the company from the individual.

First, the company earns income, pays business costs and calculates its taxable profit.

Next, Corporation Tax applies to the company.

Meanwhile, directors and shareholders may receive money through salary, dividends or other routes, each with its own tax treatment.

Finally, the company must keep proper records, meet its filing deadlines and make sure money is taken out correctly.

Understanding those different layers gives you a much clearer picture of how a limited company works financially and helps you make better decisions about tax, cash and remuneration.

Further Support

If you need help understanding your limited company’s tax position, director remuneration or financial reporting, you can contact us for an initial chat.

You can also use our free online business calculators to support your financial planning.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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Limited Company Tax Treatment: Corporation Tax, Salary and Dividends