Limited company tax basics: Corporation Tax, VAT and PAYE

Corporation Tax begins with business activity

You generally need to register for Corporation Tax within three months of starting to do business. Business activity can include buying, selling, advertising, employing someone or receiving income; it is not limited to the date of the first customer invoice.

HMRC sends a company Unique Taxpayer Reference (UTR). This is not your Companies House registration number. Keep the UTR and tax account details secure and ensure official post reaches you. If HMRC issues a notice to deliver a return, deal with it even if you think no tax is due.

Turnover, profit and cash are different

Turnover is sales income; taxable profit is calculated under tax rules, which can differ from the profit in management accounts. Cash in the account can also include loans, share capital, VAT collected or money needed for future expenses.

Not every cost is deductible, and capital purchases may be treated differently from routine expenses. Do not calculate tax simply by applying a rate to bank receipts. An accountant can consider allowable costs, capital allowances, losses and the effect of associated companies.

VAT registration is about taxable turnover

The current compulsory registration threshold is taxable turnover above £90,000 over a rolling 12-month period. There is also a separate forward-looking trigger if you expect to exceed £90,000 in the next 30 days alone. It is not an annual test that resets at the company’s financial year end.

Taxable turnover includes supplies subject to zero-rate VAT as well as standard or reduced rates; exempt supplies are treated differently. Non-UK-established businesses and other special situations can have different rules. You can sometimes register voluntarily below the threshold, but weigh pricing, customers and administration.

Monitor the threshold regularly. VAT registration brings requirements for invoices, returns, records and payment. Check HMRC’s rules for the notification deadline and effective registration date when a threshold is crossed.

Salary can create payroll obligations

If the company pays salary to a director or employee, consider PAYE registration, payroll reporting, deductions and employer obligations. The registration requirement depends on the pay and the employee’s circumstances; it is not waived merely because the company has one owner.

Dividends are not salary and cannot replace payroll reporting for amounts that are actually employment pay. Workplace pension duties and employment obligations may also apply, depending on your situation.

Tax filing and payment deadlines are not the same

For companies under the normal Corporation Tax payment rules, payment is usually due nine months and one day after the accounting period ends; the Company Tax Return is usually due within twelve months. Larger or otherwise qualifying companies may pay in instalments.

A first accounts period can be longer than twelve months while a Corporation Tax accounting period cannot, potentially requiring two tax returns. Companies House accounts, confirmation statements and HMRC returns are separate submissions.

Worth knowing: Set aside tax as you go. Waiting for a return deadline can leave too little time to fund the earlier payment.

An illustrative Corporation Tax calculation—and why a flat percentage can mislead

Under current general rates, eligible companies with profits of £50,000 or less pay the 19% small-profits rate; above £250,000 the main rate is 25%, with marginal relief potentially applying between the thresholds. The thresholds are reduced for short accounting periods and associated companies. Special company types and ring-fence profits need separate treatment.

Illustrative calculation: a qualifying company with a full 12-month period, no associated companies and £40,000 taxable profits would have £7,600 tax at 19%. That example assumes the profit is already the correct taxable figure. It does not mean a company with £40,000 in its bank account owes £7,600.

Now suppose management accounts show £100,000 profit. Do not choose an arbitrary average rate. Check tax adjustments, augmented profits, associated companies, the period length and marginal relief using HMRC guidance or professional software. Director dividends are not a deductible company expense, while the treatment of remuneration, capital assets and losses follows separate rules.

Translate trading activity into separate returns, payments and reserves

If a company incorporates on 13 October 2026 and starts business that day, first accounts ending 31 October 2027 are longer than 12 months. Corporation Tax accounting periods cannot exceed 12 months, so the company may need a return for 13 October 2026 to 12 October 2027 and another for 13 to 31 October 2027. Under ordinary payment rules, each period has its own payment and return date.

If it does not start business until 1 January 2027, the period from that date to 31 October 2027 is shorter than 12 months. Incorporation alone therefore does not determine the number of Corporation Tax returns. HMRC notices and actual activity must be reconciled with the accounts.

Set aside tax from a rolling profit estimate, not a fixed share of receipts. Keep collected VAT and payroll liabilities distinct from money available to distribute. For standard quarterly VAT, the return and payment are normally due one calendar month and seven days after the period ends; monthly electronic PAYE is due by the 22nd of the next tax month, while FPS reporting is on or before payday. Special VAT schemes and Corporation Tax instalment regimes are outside these examples.

Director Profit Extraction: A 2026/27 Salary vs. Dividend Comparison

A primary decision for a director who is also a shareholder is how to extract profits from the company in the most tax-efficient way. The two main routes are taking a salary and paying dividends. A salary is an allowable business expense, meaning it reduces the company's profit before Corporation Tax is calculated. However, the salary is subject to personal Income Tax and National Insurance Contributions (NICs) for the director, and Employer's NICs for the company. As of the 2026/27 tax year, the Employer's NIC rate is 15% on earnings above £5,000 per year.

Dividends, in contrast, are paid out of post-tax profits and are not subject to any National Insurance. They are taxed on the individual shareholder through their Self Assessment tax return. For the 2026/27 tax year, there is a £500 tax-free Dividend Allowance. The combination of avoiding Employer's and Employee's NICs typically makes a low-salary, high-dividend strategy more efficient than taking a large salary, especially when company profits are within the 19% Corporation Tax band. The optimal mix will depend on the company's profit level and the director's other personal income, but the savings on NICs are the main driver of this efficiency.

The illustrative table below compares two scenarios for extracting £50,000 of company profit. Strategy A uses a small salary kept below the thresholds where NICs apply, with the remainder taken as a dividend. Strategy B pays out the maximum possible salary. The final net income figure is illustrative as it depends on personal tax allowances, but it clearly shows the significant financial advantage of the dividend route, driven almost entirely by the savings on National Insurance contributions for both the employee and the employer.

Worth knowing: Based on an illustrative £50,000 profit extraction in 2026/27, a low-salary, high-dividend strategy yields nearly £5,000 more in net income than a high-salary strategy, primarily due to NIC savings.

Choosing a VAT Scheme: Standard, Cash Accounting, or Flat Rate

Once your company's taxable turnover in a rolling 12-month period exceeds the £90,000 threshold, you must register for VAT. However, registration is not the end of the decision-making process. HMRC offers several schemes that can simplify administration and aid cash flow compared to the default 'standard' accounting method. The three most common schemes for small businesses are the Standard Scheme, the Cash Accounting Scheme, and the Flat Rate Scheme. Choosing the most suitable one is a strategic decision that depends on your business model, customer payment cycles, and the value of your business purchases.

The Standard Scheme requires you to account for VAT based on the date of your invoices, not when you get paid. This can strain cash flow if your clients are slow to pay. The Cash Accounting Scheme directly addresses this by allowing you to account for VAT only when money is actually received or paid out. The Flat Rate Scheme offers the greatest simplicity: you apply a single, fixed percentage (which varies by industry) to your gross turnover and pay this amount to HMRC. However, under this scheme, you generally cannot reclaim VAT on your purchases and expenses, which can make it less suitable for businesses that buy a lot of VAT-able goods or services.

Worth knowing: The Cash Accounting Scheme aids businesses with slow-paying clients, while the Flat Rate Scheme simplifies paperwork but may not be cost-effective for companies with high expenses.

Managing a Director's Loan Account (DLA): Rules and Tax Traps

A Director's Loan Account (DLA) is a record kept by a company of all transactions between the company and its director that are not salary, dividends, or expense reimbursements. It tracks money the director lends to the company (a credit balance) or borrows from the company (a debit or 'overdrawn' balance). While an overdrawn DLA can offer flexibility, it is governed by strict rules that create significant tax liabilities if they are not followed meticulously. These rules exist to prevent directors from taking money out of their company tax-free.

The most severe consequence of a mismanaged DLA is the Section 455 tax charge. If a director's loan is still outstanding more than nine months and one day after the company's financial year-end, the company itself must pay a tax charge to HMRC. The rate is set to equal the higher dividend tax rate. This is not a final tax—the company can reclaim it from HMRC once the director repays the loan—but it can cause a major cash flow problem until that point. Furthermore, anti-avoidance rules prevent 'bed and breakfasting', where a loan is repaid just before the deadline and a similar amount is withdrawn shortly after.

1. 1

   Maintain a precise, real-time ledger for each director's loan account, recording the date, amount, and reason for every transaction.

2. 2

   For any loan from the company to a director, particularly for sums over £10,000, formally approve it with a board resolution and document this in the company's minutes.

3. 3

   Regularly review the DLA balance, paying close attention as the company's accounting year-end approaches.

4. 4

   Ensure any overdrawn loan balance at the year-end is fully repaid by the director within nine months and one day of that date to prevent a Section 455 tax charge.

5. 5

   Correctly report the DLA on the company's balance sheet within the annual accounts submitted to Companies House and HMRC.

6. 6

   If a loan to a director exceeds £10,000 at any point during the tax year, it must be reported as a benefit-in-kind on the director's personal Self Assessment tax return, which may lead to additional personal tax.

Worth knowing: To avoid a punitive (though refundable) Section 455 tax charge, a director's loan must be repaid within nine months of the company's year-end and all transactions must be meticulously documented.

Allowable Expenses: Avoiding Common Corporation Tax Deduction Errors

To calculate taxable profit, a company deducts its allowable expenses from its turnover. The guiding principle from HMRC is that expenses must be incurred 'wholly and exclusively' for business purposes. While costs like web hosting, accountancy fees, and employer's NICs are clearly allowable, a surprising number of legitimate business outgoings are specifically disallowed for Corporation Tax. Making incorrect claims is a common error that can lead to HMRC enquiries, amended tax returns, and penalties.

It is just as crucial to know what you cannot claim as what you can. One of the most common mistakes is trying to deduct the cost of client entertainment. While taking a client to lunch is a valid business activity, the expense is explicitly disallowed as a deduction for Corporation Tax. Another problem area is expenditure with a dual purpose that includes a private benefit. For example, travel from home to a permanent workplace is considered an ordinary commuting cost and is not deductible, and a business suit is a personal clothing choice, not a tax-deductible uniform unless it is branded or protective.

• **Client & Supplier Entertainment:** Costs for providing hospitality of any kind, such as meals, drinks, or event tickets for customers or suppliers, are not deductible against Corporation Tax.
• **Incorporation Costs:** The legal and formation agent fees for setting up the limited company are considered capital expenditure and cannot be deducted from trading profits.
• **Travel to a Permanent Workplace:** The daily commute from home to the company's fixed office or primary place of business is a non-deductible personal expense.
• **General Clothing:** The cost of everyday clothing, even a smart suit required for meetings, is not allowable. Only specific branded uniforms or necessary protective clothing qualify.
• **Legal Fines and Penalties:** Any fines, whether for a late Companies House filing, an HMRC penalty, or a parking ticket incurred by a director, are not allowable for tax relief.
• **Dividends and Drawings:** Payments to shareholders (dividends) or money taken by directors that isn't salary (drawings) are distributions of profit or capital, not business expenses.

Worth knowing: Claiming common but non-deductible costs like client entertainment and commuting expenses is a frequent error that can result in higher tax bills and unwanted HMRC attention.

The Hidden Ledger: Annual Compliance Costs Beyond Tax

While taxes on profit and sales rightly command attention, new company directors must also budget for a series of fixed annual compliance costs. These statutory fees are essential for maintaining the company's legal standing with government bodies and are payable regardless of profit or loss. Failing to pay them on time can result in financial penalties or even the forcible removal of the company from the official register. These costs are predictable and should be treated as fixed overheads in any business plan.

The core annual filing is the Confirmation Statement, which confirms to Companies House that the company's registered details are correct. As of October 2026, the fee for this is £50 when filed digitally. Additionally, if your company handles any personal data—from customer email addresses to employee records—you must register with the Information Commissioner's Office (ICO) and pay an annual data protection fee. This is structured in tiers, with most small companies paying either £52 or £78 per year. Beyond these statutory fees, directors should also budget for essential services like accountancy support and potentially a registered office address service, which represent further recurring costs.

• **Accountancy Fees:** Engaging an accountant for annual accounts, tax returns, and payroll is a near-universal cost for ensuring accuracy and compliance.
• **Registered Office Address:** Many companies use a third-party service to provide a formal registered office address, which involves an annual subscription fee.
• **Business Insurance:** Depending on the industry, public liability, employer's liability, or professional indemnity insurance may be a mandatory annual cost.
• **Software Subscriptions:** Accounting software (e.g., Xero, QuickBooks) is an essential tool for most businesses, carrying a monthly or annual fee.

Worth knowing: A typical small UK company faces over £100 in mandatory, non-tax compliance fees each year for filings with Companies House and the ICO, before accounting for professional services.

Closing a Solvent Company: Striking Off vs. Members' Voluntary Liquidation (MVL)

When a limited company has ceased trading and paid its debts but still holds assets, such as cash in the bank, it must be closed through a formal legal process. For a solvent company, directors must choose between two primary routes: an administrative strike-off or a Members' Voluntary Liquidation (MVL). The decision hinges almost entirely on the value of the company's distributable reserves. Choosing the wrong path can lead to a substantially higher tax bill for the shareholders upon receiving the final funds.

A strike-off is a simple process initiated by filing form DS01 with Companies House. It is inexpensive and straightforward, but it has a major tax drawback. Distributions made during this process are only treated as a capital gain up to £25,000. Any amount distributed above this £25,000 threshold is automatically treated as dividend income, which is taxed at higher rates and is not eligible for certain reliefs. In contrast, an MVL is a formal legal process overseen by a licensed Insolvency Practitioner. Though significantly more expensive, it ensures that all funds distributed to shareholders are treated as a capital gain, regardless of the amount. This is vital for accessing reliefs like Business Asset Disposal Relief (BADR), which, from April 2026, allows qualifying shareholders to pay a reduced Capital Gains Tax rate of 18%.

Worth knowing: If your solvent company has more than £25,000 in assets to distribute upon closing, an MVL is essential to ensure the funds are treated as a capital gain for tax purposes.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• GOV.UK: Corporation Tax
• GOV.UK: Register for Corporation Tax
• GOV.UK: When to register for VAT
• GOV.UK: Register as an employer
• HMRC: Corporation Tax rates and thresholds
• HMRC: VAT return deadlines
• HMRC: Employers’ PAYE payments

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.