Working through a limited company

Your company is a separate legal person. Money it earns belongs to the company, not to you, and is taxed twice on its way to your bank account: corporation tax on the company's profit, then personal tax on whatever you take out.

That sounds punitive, but the second layer is where the flexibility lives. You choose how much to take as salary, how much as dividends, and how much to leave in the company — and each is taxed differently.

Profits up to £50,000 are taxed at the small profits rate of 19%. Profits of £250,000 or more are taxed at the main rate of 25%. Between the two, you pay the main rate less Marginal Relief, which produces an effective rate that climbs smoothly between 19% and 25%.

The consequence is a marginal rate of 26.5% on every pound of profit between the two limits — higher than the headline main rate. It is worth knowing where you sit in that band before deciding whether to make an additional pension contribution or defer income.

Both limits are divided by the number of associated companies and pro-rated for accounting periods shorter than twelve months.

Salary is an allowable expense, so it reduces the company's profit before corporation tax. It also attracts income tax, employee National Insurance above the primary threshold, and employer National Insurance above the secondary threshold — which for 2026/27 is only £5,000.

Dividends are paid from post-corporation-tax profit, so they get no deduction, but they carry no National Insurance at all. In 2026/27 they are taxed at 10.75%, 35.75% and 39.35% depending on which band they fall into, after a £500 dividend allowance.

The common approach is a salary at or near the personal allowance — enough to use the tax-free band and maintain a qualifying year for the State Pension — with the balance taken as dividends. A salary at the secondary threshold avoids employer National Insurance entirely but leaves part of the personal allowance unused. The calculator lets you compare both against your own numbers rather than assuming.

A company expense must be incurred wholly and exclusively for the business. Accountancy fees, business insurance, equipment, software, professional subscriptions and genuine business travel generally qualify. Ordinary commuting to a single long-term workplace generally does not.

Employer pension contributions are usually the most efficient extraction route available: the company gets a corporation tax deduction, there is no National Insurance, and no personal tax until you draw the pension. They are limited by the annual allowance and by the 'wholly and exclusively' test.

When you wind up a solvent company, retained profits can be distributed as capital rather than income. Business Asset Disposal Relief may apply, taxing qualifying gains at a reduced rate — 18% for disposals on or after 6 April 2026, up from 14% the previous year and 10% before that.

The relief has a lifetime limit and conditions on how long you have held the shares and traded. Anti-avoidance rules can also treat a distribution as income if you start a similar business shortly afterwards. This is one to take advice on rather than assume.

A limited company carries real overhead: accounts, corporation tax returns, confirmation statements, payroll, and a personal Self Assessment. That is worth it at a good day rate on outside-IR35 work, and rarely worth it for occasional work or where every engagement is caught by IR35.

The advantage has also narrowed. Dividend rates rose in April 2026 and employer National Insurance rose the year before. Run your own figures through both calculators before assuming the company route wins.