Ltd Company Tax Guide — 2025/26
Updated for the 2025/26 tax year
Running a limited company is one of the most tax-efficient ways to work in the UK — but only if you understand how to extract profits correctly. This guide covers corporation tax, the optimal salary and dividend strategy, allowable expenses, and the director’s loan account.
Corporation Tax Rates 2025/26
| Profit Band | Rate | Notes |
|---|---|---|
| £0–£50,000 | 19% | Small profits rate |
| £50,001–£250,000 | Effective 26.5% | Marginal Relief applies |
| Over £250,000 | 25% | Main rate |
Marginal Relief means profits between £50,000 and £250,000 are taxed at an effective rate of 26.5% on the marginal amount. This creates a tax trap where the marginal rate actually exceeds the main rate.
Optimal Salary + Dividends Strategy
The most tax-efficient extraction for a single director in 2025/26:
- Salary: £12,570 — uses the full Personal Allowance, no income tax. Employee NI is zero (threshold aligned). Employer NI: (£12,570 − £9,100) × 13.8% = £479.
- Dividends: up to £50,270 total income — the first £500 of dividends are tax-free (dividend allowance). Dividends in the basic rate band are taxed at 8.75%.
- Above £50,270, dividends are taxed at 33.75% (higher rate) and 39.35% (additional rate above £125,140).
Allowable Expenses
Your company can claim expenses that are “wholly and exclusively” for business purposes. These reduce your taxable profit:
- Accountancy fees (typically £100–200/month)
- Professional indemnity and business insurance
- Software and subscriptions (Office 365, cloud hosting, etc.)
- Travel to client sites (not regular commuting)
- Training directly related to your current role
- Home office allowance (£6/week flat rate, or actual costs apportioned)
- Mobile phone (one contract 100% if business use)
- Equipment: laptops, monitors, desk (capital allowances)
- Company pension contributions (no NI, no BIK)
Worked Example: £100,000 Company Profit
Scenario: Single director, no other income
- Company revenue: £120,000
- Allowable expenses: £5,000
- Director salary: £12,570
- Employer NI on salary: £479
- Taxable profit: £120,000 − £5,000 − £12,570 − £479 = £101,951
Corporation Tax:
- First £50,000 at 19%: £9,500
- Next £51,951 at ~26.5% (marginal): £13,767
- Total CT: £23,267
Profit After Tax: £78,684
Personal Tax on Dividends:
- Total income: £12,570 salary + £78,684 dividends = £91,254
- Dividend allowance: £500 at 0%
- Basic rate dividends (£50,270 − £12,570 − £500 = £37,200): at 8.75% = £3,255
- Higher rate dividends (£78,684 − £37,700 = £40,984): at 33.75% = £13,832
- Total dividend tax: £17,087
Take-home: £12,570 + £78,684 − £17,087 = £74,167
Effective tax rate: ~38.2% on £120,000 gross. Compare to ~42%+ as an employee on equivalent salary.
Pension Contributions via Company
Employer pension contributions are one of the most powerful tools available. They are:
- A deductible company expense (reduces corporation tax)
- Not subject to employer NI
- Not a benefit in kind
- Not counted as personal income
Contributing £40,000 from the company to your SIPP saves ~£10,000+ in corporation tax and avoids all personal tax on that amount.
Director’s Loan Account (DLA)
The DLA tracks money flowing between you and your company. If the company owes you money (you lent it funds), that is fine. But if you owe the company money (you withdrew more than salary + dividends):
- The company must pay 33.75% Section 455 tax on the outstanding balance if not repaid within 9 months of the year end.
- You may be charged a benefit in kind(taxed as income) on the loan balance at HMRC’s official interest rate.
- The S455 tax is refunded when the loan is repaid, but it ties up cash.
Rule of thumb: Never draw more from the company than your declared salary + dividends. Keep the DLA at zero or in your favour.
Practical Tips
- Keep profits under £50,000 if possible (use pension contributions) to stay at the 19% small profits rate.
- Claim ALL allowable expenses — many directors miss home office, phone, and mileage claims.
- File your Corporation Tax return within 12 months and pay within 9 months of your accounting year end.
- Register for flat-rate VAT if turnover is under £150,000 — you may keep the difference between what you charge and what you pay.
- Get a specialist contractor accountant — they pay for themselves many times over.