Limited Company Tax Essentials for Contractors

Overview

Operating as a limited company contractor in the UK brings significant tax considerations. This guide sets out the main tax obligations you are likely to face in the 2025/26 tax year. Understanding these responsibilities is vital for compliance, minimising liabilities, and ensuring your business operates efficiently.

Key Taxes for Limited Company Contractors

Corporation Tax

Corporation tax is payable on a company’s profits. The rates for 2025/26 are tiered:

Profit Band	Rate
Up to £50,000	19%
£50,001 to £250,000	26.5%*
Above £250,000	25%

*The 26.5% rate applies to profits within the band due to the marginal relief structure.

Key points:

• Your accountant must inform HMRC when your company is formed.
• Corporation tax returns (CT600) are filed annually online.
• Payment is due within nine months of your company’s year end.
• Contractors subject to IR35 rules typically pay themselves a deemed salary, leaving little or no corporation tax liability.

Value Added Tax (VAT)

Most contractors register for VAT, even if they do not expect to exceed the £90,000 turnover threshold. There are two main schemes:
• Standard VAT Scheme: VAT is calculated on each transaction.
• Flat Rate VAT Scheme: A fixed percentage is applied to turnover (14.5% for most, with a 1% discount in your first year).

Note: Since April 2017, ‘limited cost traders’ must use a higher 16.5% flat rate, reducing the benefit of this scheme for many contractors.

Filing: VAT returns are submitted quarterly. Payment is due within one month of the period’s end, or within an additional seven days if paying by direct debit.

Employers’ National Insurance Contributions (NICs)

Limited companies pay Class 1 NICs on salaries paid to employees, including directors:
• 15% on salary at or above £5,000 per annum.

Employment Allowance:

• If your company has more than one employee (not a sole director), you may reclaim up to £10,500 in Employers’ NICs annually.
• Most directors pay themselves low salaries and may not benefit significantly from this allowance.

Employees’ National Insurance Contributions

Directors and employees pay Class 1 NICs on their earnings:

Earnings Band	Rate
£12,570 – £50,270	8%
Above £50,270	2%

Income Tax

Salaries drawn as a director are subject to PAYE. For 2025/26:
• Personal Allowance: £12,570 (reduced £1 for every £2 over £100,000 income)

Band	Earnings (£)	Rate
Basic Rate	£12,571–£50,270	20%
Higher Rate	£50,271–£125,140	40%
Additional Rate	Over £125,140	45%

Income above the personal allowance is taxed accordingly. PAYE ensures taxes are deducted before salary is paid.

Dividend Tax

If you are outside IR35, most of your post-tax profits are drawn as dividends. The structure for 2025/26 is:

Dividend Income Band	Tax Rate
Annual allowance (first £500)	0%
Basic Rate (up to £50,270 total)	8.75%
Higher Rate	33.75%
Additional Rate	39.35%

Note: The dividend allowance was reduced from £1,000 to £500 in April 2024.

Tax on dividends is paid via the annual self-assessment process.

Other Taxes

You may also encounter:
• Capital Gains Tax: On profit from investments or when selling your company.
• Other sector-specific levies depending on your business activities.

Typical Filing Responsibilities

• Corporation Tax: Annual, with payment due nine months after year end.
• VAT: Quarterly returns and payment.
• PAYE/NICs: Monthly or quarterly via payroll.
• Self-Assessment: Annually, for personal income and dividend tax.

Practical Troubleshooting

Common issues and solutions:
• Missed deadlines: HMRC imposes penalties for late filings or payments. Set reminders and use an accountant.
• Incorrect tax band calculations: Regularly review the latest thresholds and rates. Annual changes are common.
• Eligibility for allowances: Confirm with your accountant if you qualify for Employment Allowance.
• IR35 uncertainty: If in doubt, seek a professional contract review to determine your status.

Next Steps for Contractors

1. Engage a specialist contractor accountant to manage compliance and optimise your tax position.

2. Register promptly with HMRC for all necessary taxes.

3. Keep accurate, up-to-date records of all income and expenses.

4. Monitor changes to tax rates and allowances each tax year.

5. Use online tools or calculators to model your take-home pay under different scenarios.

Understanding your tax landscape is central to successful limited company contracting. Professional advice and proactive management are strongly advised.