Which Taxes do Limited Companies Pay? A Complete Guide

Which Taxes do Limited Companies Pay? A Complete Guide 

Running a limited company comes with a fair bit of admin - and one area that can feel especially tricky to navigate is tax. From corporation tax to VAT, National Insurance to dividend tax, there are few different types of taxes your company might need to deal with, depending on how you trade, how much you earn, and how you pay yourself.

In the sections below, we’ll break down the key taxes limited companies are subject to, explain how they work, and flag important thresholds, rates, and allowances to be aware of.

Corporation tax

This is a type of tax paid on your limited company’s profits within each accounting period, which is typically 12 months, and must be paid within nine months of the end of your financial year.  It’s calculated by deducting your allowable expenses from the company’s income.

Allowable expenses are the costs that are ‘wholly and exclusively’ for the purpose of running your business - things like staff wages, office rent, software subscriptions, travel for work, and professional fees. Once you’ve deducted these expenses, what’s left is your taxable profit, and that’s what corporation tax is charged on.

Since April 2023, the corporation tax rate is 25% for companies with profits over £250,000. If your profits are £50,000 or less, you’ll pay the small profits rate of 19%. 

If your profits fall somewhere in between, you may be entitled to something called Marginal Relief. This is a way to gradually increase the tax rate from 19% to 25% as your profits rise, rather than jumping straight from one to the other. It effectively reduces the amount of tax you pay on profits between £50,000 (the lower limit) and £250,000 (the upper limit), softening the transition between the lower and higher rates.  Just bear in mind that the upper and lower limits may be adjusted if your company’s accounting period is more or less than a calendar year. 

HMRC provides an online marginal relief calculator to help work out exactly what you owe if you fall into this middle bracket - and it’s worth using to make sure you’re not overpaying.

Read more: Sole trader Vs limited company: what’s the difference, and which is right for you? 

National Insurance Contributions (NICs)

You’ll already be familiar with NICs – a form of tax used to fund state benefits and services like the state pension and NHS. If you’re a limited company director, you could be liable to pay National Insurance as an employer and as an employee. All of these fall under Class 1 NICs, which are split up into different types. 

• Class 1 Employee’s NICs: These are deducted from your employees’ (and directors’) salaries through the PAYE system, just like income tax. The amount depends on how much the employee earns.
• Class 1 Employer’s NICs: This is what your company pays on top of your employees’ salaries when they earn above a certain threshold. As of the 2025/26 tax year, employers pay 15% on earnings over £5000 per year. 
• Class 1A NICs: These are paid by your company on most taxable benefits provided to employees or directors. So if you offer things like a company car, private medical insurance, or gym memberships as perks, you’ll need to pay Class 1A NICs on the value of those benefits.
• Class 1B NICs: These come into play if your company has a PAYE Settlement Agreement (PSA) with HMRC. A PSA lets you settle the tax and NIC on certain minor, irregular, or difficult-to-work-out benefits on behalf of your employees  – things like staff Christmas parties or small gifts.

Good to know: From 2025/26, eligible businesses can claim a reduction of up to £10,5000 against their employers’ class 1 NI liability. This is known as the Employment Allowance. However, there are eligibility rules - for example, if you’re a company where the only employee is a director, you won’t qualify.

VAT 

VAT is a tax charged on most goods and services sold in the UK. It’s collected by businesses on behalf of HMRC - so while it’s the customer who ultimately pays it, your limited company acts as the middleman if you’re VAT registered.

You must register your company for VAT if your VAT-taxable turnover exceeds £90,000 (as of April 2024) in any rolling 12-month period. You can also choose to register voluntarily if your turnover is below this threshold, which some companies do because it can make their business appear more established or allow them to reclaim VAT on expenses.

VAT rates to know

• 20%: Standard rate (most goods and services)
• 5%: Reduced rate (some home energy, children’s car seats, etc.)
• 0%: Zero-rated items (certain foods, books, children’s clothes) 

Some goods and services are also exempt from VAT (like insurance, education and training and charity fundraising events ), meaning you don’t charge VAT on them and can’t reclaim VAT on related costs.

There are a few optional VAT accounting schemes that can simplify your VAT reporting:

• Flat rate scheme: You pay a fixed percentage of your turnover to HMRC, which can be simpler than working out VAT on every transaction. Read more: A complete guide to the flat rate VAT scheme for small businesses
• Cash accounting scheme: You only pay VAT to HMRC when your customers pay you - helpful for cash flow. This scheme is available to businesses with a VAT taxable turnover of £1.35 million or less. 
• Annual accounting scheme: Submit one VAT return per year with advance payments throughout the year, instead of quarterly returns. The same turnover restriction also applies.

Tax on dividends

When you run a limited company, one of the most tax-efficient ways to pay yourself (after taking a salary) is through dividends. Dividends are payments made to shareholders from the company’s profits left over after paying other liabilities like corporation tax and VAT. 

Unlike salary, dividends aren’t subject to National Insurance Contributions. However, you do pay dividend tax on the amounts you receive over a certain allowance - £500 as of 2025. After that, you’ll pay tax on dividends at the following rates, depending on your total taxable income.

To work out your tax band, you’ll need to add your total dividend income to your other income. You may pay tax at more than one rate. HMRC has an online tool to help you figure out how much you should be paying. 

You declare your dividend income on your Self Assessment tax return at the end of the tax year. HMRC will then work out what you owe, and you’ll pay it as part of your tax bill. 

Income tax

Although your limited company is a separate legal entity and pays its own taxes (like corporation tax and employer NICs), you’ll also need to pay income tax personally on the money you earn from the business - whether that’s through a salary, dividends, or other taxable income.

If you take a salary through your company’s payroll (which most directors do), income tax is deducted from your wages via the PAYE system, just like it would be if you were employed by someone else. The amount of tax you pay depends on your total earnings and which income tax band you fall into.

Good to know: Your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,140 or above. 

As we covered earlier, dividends are taxed separately from salary and have their own rates. You’ll declare both your salary and dividend income on your Self Assessment tax return, and HMRC will calculate what you owe. If you have any additional personal income - like rental income or savings interest, or side-hustle profits - these also count towards your total taxable income and may affect which tax band you fall into.