UK limited companies pay several different types of taxes. Corporation tax on profits is the most visible, but employers’ National Insurance, business rates, VAT and the taxes payable when profit is distributed all add to the total bill. Directors who focus only on corporation tax are likely to underestimate what the company actually owes. This article covers each tax in turn.
- Corporation tax is paid on taxable profits, after adjusting accounting profit for disallowable expenses and capital allowances, not on the headline profit in the accounts.
- Capital allowances such as AIA, Full Expensing and Writing Down Allowances give tax relief on qualifying assets instead of accounting depreciation.
- The accounting reference date fixes the corporation tax period and key filing and payment deadlines; changing it shifts all subsequent due dates.
- Employer National Insurance, business rates, VAT and dividend tax all add to a company’s total tax burden alongside corporation tax.
- Close company rules, director’s loan accounts, benefits in kind and tax planning options like pension contributions and R&D relief need active management.
Corporation Tax
Corporation tax is the main tax paid by UK limited companies on their taxable profits. It is important to understand that it is paid by the company itself, not by directors or shareholders personally. The current rates of corporation tax as of 2025/26 are as follows:
| Profit level | Rate |
|---|---|
|
Up to £50,000 |
19% (small profits rate) |
|
£50,001 to £250,000 |
Marginal relief applies |
|
Over £250,000 |
25% (main rate) |
The small profits rate applies to companies with annual profits up to £50,000. The main rate of 25% applies above the upper threshold. These thresholds are for a standalone company; if your company has associated companies under common control, the thresholds are divided among all of them. Before a company can file its first return, it must register for corporation tax with HMRC within three months of becoming active.
How a Limited Company Calculates Taxable Profit
Taxable profit is not the same as the net profit figure in a company’s accounts. HMRC requires companies to adjust the accounting profit in line with tax law before applying the rate.
Gross income covers all trading revenue, investment income and any chargeable gains from asset disposals. Allowable business expenses are then deducted. HMRC’s test is whether costs were incurred wholly and exclusively for business purposes. Common allowable expenses include staff costs, office and operational costs, professional fees, marketing, business travel, and bank charges and loan interest. Costs that cannot be deducted include client entertainment, personal expenditure, fines and political donations. After adjusting for expenses, the figure is further reduced by capital allowances before arriving at the taxable profit.
Capital Allowances for Limited Companies
Capital allowances provide tax relief on the purchase of physical assets used in the business. Accounting depreciation is not itself tax deductible, so capital allowances are the mechanism through which asset purchases reduce the corporation tax bill.
The Annual Investment Allowance (AIA) provides 100% tax relief on qualifying expenditure, including machinery, equipment and most plant, up to £1 million per year. Full Expensing, introduced from April 2023 for incorporated businesses, extends 100% first-year relief to new qualifying plant and machinery with no annual cap. For assets outside both AIA and Full Expensing, a Writing Down Allowance of 18% (main pool) or 6% (special rate pool) applies on a reducing balance basis.
What Is Meant by “Marginal Relief”?
Marginal relief prevents a sharp increase in the tax rate once profits cross £50,000. Without it, a company whose profits crossed that threshold would face the full 25% rate on its entire profit, not just on the amount above it.
The formal calculation is: (3/200) x (upper limit minus augmented profits) x (taxable profits divided by augmented profits). In practice, profits between the lower and upper thresholds face an effective marginal rate of approximately 26.5%, while the overall effective rate stays between 19% and 25%. HMRC provides an online marginal relief calculator. The position becomes more complex when a company has investment income or when the associated company rules apply.
The Accounting Reference Date and Its Importance
The accounting reference date (ARD) is the final day of a limited company’s financial year. Companies House sets it automatically as the anniversary of the last day of the month of incorporation. The ARD determines the corporation tax accounting period and sets two key deadlines:
| Obligation | Deadline |
|---|---|
|
Corporation tax payment |
9 months and 1 day after accounting period end |
|
Company Tax Return (CT600) |
12 months after accounting period end |
An ARD can be shortened at any time or extended once every five years. Changing it moves every tax and filing deadline that follows.
Employer’s National Insurance Contributions
A limited company that employs staff, including a director paying themselves a salary, is liable for the employer’s Class 1 National Insurance contributions (NIC). This is a cost to the company, not the employee.
From 6th April 2025, the employer NIC rate increased to 15%, payable on employee earnings above the Secondary Threshold, which was reduced to £5,000 per year. The Employment Allowance increased to £10,500 per year, with the £100,000 eligibility cap removed. Most small limited companies can use this allowance to reduce their employer NIC bill, though directors-only companies with no other employees cannot claim it. Employer NIC is an allowable business expense and therefore reduces taxable profit.
Business Rates and Limited Company Premises
Business rates are a property tax levied on companies occupying commercial premises. They are charged by local authorities based on the rateable value of the property, multiplied by a national multiplier set by the government. From 1st April 2026, new multipliers came into force:
| Property category | Multiplier |
|---|---|
|
Small business, retail/hospitality/leisure (RV under £51,000) |
38.2p |
|
Standard retail/hospitality/leisure (RV £51,000 to £499,999) |
43.0p |
|
Small business, other (RV under £51,000) |
43.2p |
|
Large property (RV £500,000 and above) |
50.8p |
Small Business Rate Relief is available to companies occupying a single property with a rateable value up to £15,000. Properties valued at £12,000 or below qualify for 100% relief.
How a limited company pays its tax bill
Corporation tax is self-assessed. The company calculates its own liability, pays by the deadline and files the CT600 return separately. Payment is made to HMRC using a 17-character CT payment reference that changes for each accounting period.
Larger limited companies with profits above £1.5 million pay corporation tax in quarterly instalments, with the first instalment due in the seventh month of the accounting period.
Late payment penalties for limited companies
HMRC applies late filing penalties automatically when the CT600 is submitted after the 12-month deadline:
| How late | Penalty |
|---|---|
|
1 day late |
£100 |
|
3 months late |
Additional £100 |
|
6 months late |
Additional 10% of unpaid corporation tax |
|
12 months late |
Further 10% of unpaid corporation tax |
f a company files late for three consecutive periods, the flat penalties increase to £500 each. For late payment, HMRC charges daily interest from the day after the payment deadline. From 6th April 2025, the rate is the Bank of England base rate plus 4 percentage points, currently 8.5% per year.
Dividend tax and VAT
When a limited company distributes profits to shareholders as dividends, those dividends are taxed in the hands of the recipient. Each individual has a dividend allowance of £500 per year, with amounts above that taxed at rates ranging from 10.75% to 39.35% depending on income tax band.
VAT applies once a company’s taxable turnover crosses the £90,000 registration threshold, currently charged at a standard rate of 20% on most goods and services. It is important to take the time to understand how VAT works and which accounting schemes are available for your business.
Tax planning strategies for limited companies
A limited company has more planning options than a sole trader. Claiming every allowable expense, maximising capital allowances in years of capital investment, making employer pension contributions, using loss relief across accounting periods, and claiming R&D tax credits where qualifying innovation expenditure exists can all reduce the bill.
Salary and dividend structuring also affects the overall tax position, though the gap between the two approaches has narrowed with recent rate changes. Getting an accountant involved early in a company’s life makes it easier to apply these options correctly from the start. Before deciding on the best structure for your business, we recommend taking the time to understand the business taxes payable by different entity types, including sole traders, partnerships and employers.
What is a close company, and what are the tax implications?
Most small limited companies in the UK are ‘close companies’, i.e. those controlled by five or fewer people, which includes most owner-managed businesses. HMRC applies specific rules to close companies that do not apply to larger corporations, and directors need to be aware of them.
The most common issue is the director’s loan account. If a director borrows money from the company and the loan is not repaid within nine months of the accounting period end, the company pays a Section 455 tax charge of 33.75% on the outstanding amount. That charge is repayable once the loan is cleared, but it ties up cash in the meantime. Benefits in kind provided to directors, such as private medical insurance or a company car, also carry a Class 1A National Insurance liability for the company and a personal tax liability for the director. Neither is difficult to manage, but both need to be accounted for correctly from the start.
Final words
A UK limited company pays corporation tax on profits, employer NIC on payroll, business rates on property, VAT on turnover, and personal taxes on any salary or dividends drawn. Understanding each of these obligations, how they are calculated, when they fall due and where reliefs apply means directors can plan ahead rather than deal with surprises at year’s end. Most of the complexity is manageable once the overall structure is clear.
Tags: Tax, Accounting, VAT
