How Ltd Company Tax Works
Operating through a limited company means your business pays corporation tax on its profits, and you pay personal tax on what you extract — as salary, dividends, or both. Unlike sole trading, there is a legal separation between you and the company, which adds complexity but can offer tax advantages at higher income levels.
Corporation tax for 2025/26 is 19% on profits up to £50,000 (the Small Profits Rate) and 25% for profits over £250,000 (the Main Rate), with marginal relief between these thresholds. This compares favourably to higher-rate income tax of 40% for sole traders on the same profits — though the saving must be weighed against higher accountancy costs and administrative obligations.
Salary vs Dividend Planning
Most Ltd company directors pay themselves a low salary — typically at or near the NI primary threshold (£12,570) or the NI secondary threshold — and take the rest as dividends. This minimises NI exposure while using the personal allowance efficiently. A salary of £12,570 costs no income tax or NI, but does count as a pension-qualifying year.
Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate) above the £500 dividend allowance. For directors earning £50,000–£80,000, the combination of low salary + dividends typically results in a meaningfully lower tax bill than sole trading at the same income level. See PAYE vs Ltd company calculator for a direct comparison.
What Tax Does a Limited Company Pay?
| Profit Level | Corporation Tax Rate |
|---|---|
| Up to £50,000 | 19% (Small Profits Rate) |
| £50,001 – £250,000 | Marginal Relief (effective rate rises to 25%) |
| Over £250,000 | 25% (Main Rate) |
Source: HMRC / gov.uk · Rates correct for 2025/26 tax year.
The company pays corporation tax on its profits. What remains after corporation tax is distributable profit — from which dividends can be paid. As a director you also pay personal tax on your salary and dividends through Self Assessment.