Limited Company Tax Explained: Corporation Tax, Dividends and Salary

A UK limited company pays corporation tax on its profits at 19% up to £50,000 and 25% above £250,000, with a 26.5% marginal rate in between. You then pay personal tax on whatever you take out: salary is taxed as employment income (with employee and employer National Insurance), while dividends come from post-tax profit and are taxed at 10.75%, 35.75% or 39.35% after a £500 dividend allowance.

That two-layer structure is the whole game. The company pays once, you pay again, and the mix of salary and dividends you choose changes the total.

Key points

• Corporation tax is 19% on profits to £50,000, 25% above £250,000, and an effective 26.5% on every pound between the two.
• Salary and employer NI are deductible from company profit; dividends are not.
• Dividend tax rates for 2026/27 are 10.75% (basic), 35.75% (higher) and 39.35% (additional), after a £500 dividend allowance.
• Employer NI is 15% on pay above £5,000 a year, which is why the "right" salary depends on whether you can claim the Employment Allowance.
• VAT registration is compulsory once taxable turnover passes £90,000 in any rolling 12 months.

Corporation tax: the first layer

Corporation tax is charged on taxable profit — turnover less allowable costs, including your own salary, employer NI, and capital allowances on equipment. For 2026/27:

• Small profits rate: 19% on profits up to £50,000.
• Main rate: 25% on profits from £250,000.
• Marginal relief between £50,000 and £250,000, which produces an effective marginal rate of 26.5%.

The arithmetic for marginal relief is simple: take 25% of profits, then subtract 1.5% of the gap between £250,000 and your profits.

Check the £100,000 row: 25% of £100,000 is £25,000, less 1.5% of (£250,000 − £100,000) = £2,250, giving £22,750.

How to "avoid" the 25% corporation tax rate

There is no trick here, and schemes that promise one usually fail. The only legitimate levers are reducing taxable profit and understanding the limits:

• Claim everything you are entitled to. Genuine business costs, capital allowances on equipment and vans (the Annual Investment Allowance covers up to £1,000,000 of qualifying spend), and employer pension contributions all reduce profit.
• Time profit and spending. Profit falling in the 26.5% marginal band is the most expensive to earn, so the value of a deductible cost is highest there.
• Watch associated companies. If you control more than one company, the £50,000 and £250,000 limits are divided between them. Two associated companies means the 19% rate only applies to the first £25,000 each.
• Short accounting periods. The limits are also reduced pro-rata for periods shorter than 12 months.

Corporation tax is due nine months and one day after the end of the accounting period, and the CT600 return is due 12 months after the period end — so the money leaves before the paperwork is due. Very large companies pay by quarterly instalments instead.

Salary: deductible, but NI-heavy

A director's salary is an allowable company cost, so every pound of salary saves corporation tax at 19%, 26.5% or 25%. The catch is National Insurance:

• Employer NI at 15% on earnings above the £5,000 secondary threshold.
• Employee NI at 8% on earnings between £12,570 and £50,270, then 2% above.
• Income tax at the usual rates once pay exceeds the £12,570 Personal Allowance — 20% on the next £37,700 of taxable income, 40% to £125,140, then 45%.

That combination means salary above the Personal Allowance is generally poor value for a director-shareholder: 20% income tax plus 8% employee NI plus 15% employer NI, against corporation tax relief of at most 26.5%. Two salary levels dominate in practice: £5,000 (no employer NI at all) and £12,570 (uses the full Personal Allowance and stays below employee NI).

Salary also does something dividends cannot: earnings above the Lower Earnings Limit build qualifying years towards the State Pension and contributory benefits. A £12,570 salary secures a qualifying year; taking dividends only does not.

If you are a Scottish taxpayer, Scottish income tax rates apply to your salary (starter 19%, basic 20%, intermediate 21%, higher 42%, advanced 45%, top 48%), but National Insurance and dividend tax rates are the same across the UK.

Dividends: the second layer

Dividends can only be paid from retained post-tax profit. Pay more than the company has available and it is not a dividend at all — it becomes a director's loan, which can trigger a separate company tax charge and a benefit-in-kind on cheap credit. Keep board minutes and a dividend voucher for each payment.

For 2026/27 the first £500 of dividends is covered by the dividend allowance, then:

Two details catch people out. First, the £500 allowance is not extra tax-free income on top of a band — it uses up part of the band it sits in, so a basic-rate director effectively pays 10.75% on £37,200 rather than £37,700. Second, dividends are treated as the top slice of income, so they are what pushes you into the higher band once salary, rental profit and interest are counted.

Dividend tax is paid through Self Assessment, not payroll, so it arrives as a bill on 31 January (plus payments on account once it passes £1,000). Setting the cash aside as you take the dividends avoids an unpleasant January.

Employer NI and the Employment Allowance

Employer NI is 15% on all earnings above £5,000 a year per employee. A £12,570 salary therefore costs the company £1,135.50 in employer NI ((£12,570 − £5,000) × 15%), although the NI itself is a deductible cost.

The Employment Allowance can wipe that out — it offsets employer NI up to an annual cap. The crucial restriction: a company cannot claim it if the only person on the payroll paid above the secondary threshold is a single director. So:

• One-person company: no Employment Allowance, so employer NI is a real cost of paying yourself above £5,000.
• Two or more directors or employees paid above £5,000: the allowance is usually available, and a £12,570 salary each costs no employer NI at all.

VAT

VAT is separate from company profit — you collect it and hand it over. Registration is compulsory once taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to pass it in the next 30 days alone. You can deregister once turnover falls below £88,000.

The standard rate is 20%, with a 5% reduced rate on things like domestic fuel and some energy-saving work. Registering voluntarily before you need to can make sense if your customers are VAT-registered businesses and you have input VAT to reclaim; it rarely helps if you sell to consumers, because your prices effectively rise by a sixth or you absorb the cost.

On the Flat Rate Scheme you pay a fixed percentage of gross turnover, with a 1% discount in your first year of registration. But if your goods spend is low — the "limited cost trader" test — your rate is 16.5% of gross turnover, which for most service companies is worse than standard VAT accounting. All VAT-registered businesses file through Making Tax Digital for VAT.

Extracting profit efficiently: the numbers

Here is the same company, three ways. Profit before any director pay is £80,000, the director has no other income, and lives in England.

Working through option A: corporation tax is 19% on the first £50,000 (£9,500) plus 26.5% on the remaining £16,294.50 (£4,318.04). The salary uses the full Personal Allowance, so all £52,476.46 of dividends is taxable income: £500 covered by the dividend allowance, £37,200 taxed at 10.75% (£3,999.00), and £14,776.46 at 35.75% (£5,282.59).

The pattern holds fairly generally. Paying salary up to the Personal Allowance usually beats the £5,000 level even when employer NI is payable, because the corporation tax and dividend tax saved outweighs the 15% NI — and it gets clearly better if the Employment Allowance is available. Here the gap is £752.66 (A over B) and £1,288.89 (C over B).

What else changes the answer

• Other income. Rental profit, a pension or a second job uses up your Personal Allowance and basic-rate band first, pushing dividends into the 35.75% rate.
• Employer pension contributions. These are deductible for the company, carry no NI, and are not taxed on you when paid in — often the most efficient extraction route once the basic-rate band is full, within the £60,000 annual allowance.
• Income over £100,000. The Personal Allowance tapers away, creating a 60%-plus effective rate band, so dividend timing matters a great deal.
• Retaining profit. You do not have to take everything. Leaving profit in the company defers the dividend tax, though it stays exposed to corporation tax on any interest earned.
• Scotland. Because dividend rates are UK-wide but salary follows Scottish rates, the salary-versus-dividend crossover point sits in a slightly different place for Scottish taxpayers.

For the full side-by-side comparison, including pension contributions and bonus routes, see our guide to salary versus dividends for directors in 2026/27.

What to do next

Put your own figures in rather than relying on rules of thumb. The limited company tax calculator works out corporation tax, dividend tax and your total take-home from a single profit figure, and the director extraction decision tool compares salary, dividends and pension contributions side by side. If you just want a sanity check on your current payroll, run the director pay check.

Official rates and registration services are on GOV.UK: corporation tax rates and when to register for VAT.