5 tax benefits of a limited company

Running your business as a limited company can unlock significant tax advantages compared to operating as a sole trader or partnership. By structuring your business carefully, you can minimise your overall tax burden, increase profitability, and create greater financial flexibility.

In this guide, we’ll explore five key tax benefits of operating through a limited company—from attractive Corporation Tax rates to flexible remuneration strategies and pension contribution relief.

Remember, each business has unique needs. If your financial situation or business goals are complex, always consult an accountant. They’ll help ensure you choose the right structure to maximise these benefits effectively.

1. Minimising tax on profits and personal remuneration

Since limited companies exist as legal entities separate from their owners, all taxable business profits are liable to Corporation Tax between 19% and 25%.

As a director and shareholder of a company limited by shares, you’ll also be liable for personal tax on money you take from the business. However, you can pay yourself in different ways to minimise your personal tax liability. 

In contrast, sole traders and partners in business partnerships pay 20-45% Income Tax and 6% National Insurance contributions (NICs) on all profits above their tax-free Personal Allowance. 

Favourable Corporation Tax rates and flexible remuneration options mean that forming a limited company is often more tax-efficient than operating in a self-employed capacity. 

The best strategy for company owners is to take a small director’s salary topped up with regular dividends. Doing so can provide the following tax benefits to you and your company:

Reduces your Income Tax and NIC liability

If you take a director’s salary of £6,500 per year (the NIC Lower Earnings Limit), you won’t pay any Income Tax or Class 1 National Insurance contributions. However, your NIC will be ‘treated as paid’. This means you’ll maintain your entitlement to contributory benefits, including the State Pension.

Additionally, the company won’t be liable for employer (secondary) Class 1 National Insurance on the salary. Employers only start paying NICs on an employee’s (or director’s) earnings when they reach £5,000 per year (the NIC Secondary Threshold).

If you want to take a salary above £5,000 per year, you may be able to claim Employment Allowance to reduce your company’s employer NIC bill by up to £10,500 per year. To be eligible, the company must have at least one other director or employee liable for employer NICs.

Lowers your company’s Corporation Tax bill

Salaries and wages are allowable business expenses. Therefore, any director’s salary you take (and any secondary NICs paid by the company) will reduce your company’s taxable profits and, thus, lower your Corporation Tax bill. This is one of the reasons why paying yourself a combination of salary and dividends is more beneficial than taking all of your income as dividends.

If you own a buy-to-let property through a company, you’ll also get full tax relief on mortgage interest, whereas individuals can only claim tax relief at the basic rate (£20%). Although it’s worth noting that companies do not have the Capital Gains Tax allowance that is available to individuals when it comes to selling property. 

You’ll benefit from the tax-free dividend allowance

Company shareholders enjoy an annual dividend allowance of £500 (over and above their tax-free Personal Allowance). This means you won’t pay any personal tax on the first £500 of dividends you receive in the tax year, regardless of your total annual income from other sources. 

Dividend tax rates are lower than Income Tax rates

If your company makes a profit, you can supplement your director’s salary with dividend income. Dividends are distributions of company profits to shareholders after the deduction of Corporation Tax.

To account for the tax already paid by the company, dividend tax rates are more favourable than Income Tax rates on salaries. Moreover, you won’t pay National Insurance on dividend income.

• How to pay myself from a limited company
• Dividends – do all shareholders get them?
• 2024-25 tax guide for UK business owners

The amount of tax you pay on dividends above the £500 allowance and your annual Personal Allowance* depends on your Income Tax band for the year. The current dividend tax rates are as follows:

• 8.75% (basic rate)
• 33.75% (higher rate)
• 39.35% (additional rate)

To work out your tax band, add your total dividends to all other sources of personal income for the year. You may pay tax on dividends at more than one rate if you’re a higher rate or additional rate taxpayer.

*The standard Personal Allowance is £12,570 per year. It reduces by £1 for every £2 you earn over £100,000, so your Personal Allowance will be zero if you earn more than £125,140 per year. This has a direct impact on the taxable income that falls within each tax band for Income Tax and dividend tax purposes.   

2. Tax relief on company pension contributions

Employer pension contributions are another potential tax benefit of operating as a limited company. As a director, contributing pre-tax company income to a private pension is generally more tax-efficient than making personal contributions from your own earnings.

The benefits of making pension contributions through a limited company include:

• Tax savings for the company – Employer pension contributions are classified as allowable expenses if they pass HMRC’s ‘wholly and exclusively’ test. This means you can offset the payments against the company’s Corporation Tax bill.
• No National Insurance contributions – The company won’t pay employer NICs on the pension contributions it makes on your behalf. You’ll also save employee Class 1 NICs by contributing directly from the company rather than your salary.
• Utilising your full annual allowance – In a tax year, tax relief on contributions is limited to £60,000 or 100% of your annual salary (whichever is lower). However, as an employer, your company can contribute more than your salary, enabling you to take advantage of the full annual allowance of £60,000. Be aware that you’ll have a reduced (tapered) annual allowance if you earn more than £200,000 per year.  

You may also be able to carry forward unused annual allowances from the previous 3 tax years if you were enrolled in a registered pension scheme during that time. But bear in mind that your pension funds may not be accessible until you turn 55, so you need to weigh the immediate tax benefits against your current income requirements.

3. Maximising tax efficiency with a director’s loan

A director’s loan occurs when a director withdraws money from a company that isn’t a salary, dividend, reimbursement of expenses, or capital they’ve previously paid into or loaned to the business. 

Taking a director’s loan from your limited company can be beneficial under certain circumstances. If managed strategically, it can provide a tax-efficient solution to short-term personal cash flow issues. 

Basic tax rules on a director’s loan

• If it’s more than £10,000 and the individual is both a director and shareholder, the company must treat the loan as a ‘benefit in kind’ and pay National Insurance on the value. The director may also have to pay tax on the loan at HMRC’s official rate of interest (currently 3.75%). Additional tax may apply if the interest charge is below the official rate.
• On loans below £10,000, no tax will be due by the director or company if the loan is repaid within 9 months of the end of the company’s Corporation Tax accounting period. 
• If a loan is not repaid within 9 months of that date, the company must pay 33.75% Section 455 tax on the outstanding amount. Interest will also apply. However, the tax is refundable 9 months after the end of the accounting period in which the loan is repaid in full.
• If the company writes off the loan, the director must pay Income Tax on the full amount through Self Assessment. The company will also be liable for paying employer NICs. 

When a director has paid personal money into their company (e.g. startup funding or a loan to plug a temporary gap in cash flow) that exceeds any director’s loan they owe, they can withdraw this money from the business at any time without facing any tax implications.  

The rules on directors’ loans can be complex, so it’s best to seek professional advice from an accountant. 

4.  Tax savings on life insurance

If you’re a UK resident director, you can save tax by switching your personal life insurance cover to a relevant life insurance policy paid through your business.  

Doing so may enable your company to offset the cost of the premiums against its Corporation Tax bill if the policy forms part of your director’s remuneration package. Moreover, neither you nor the company will pay tax on the benefit because it’s not treated as a ‘benefit in kind’.  

This type of policy is only available to employees, including directors and salaried partners. It’s not available to self-employed individuals or shareholders who are not employees.

5. Leaving surplus income in the business

By operating as a limited company, you can retain surplus income in the business for reinvestment purposes or to withdraw in a future tax year. This may be an effective tax-planning strategy if, for example, taking all distributable profits as dividends in the current tax year would push you into the higher-rate or additional-rate tax bracket. 

Self-employed business owners don’t have this option. They are liable for Income Tax and NIC on all profit in the year it is generated, even if they leave some of it in the business.  

While it may be tempting to withdraw all available profit from your business, retained earnings provide a safety net in the event of unexpected expenses or economic instability. Retained profit can also help you maintain a healthy cash flow, fund future projects, attract investment, and grow your business. 

However, if you plan to invest the surplus income, it’s worth noting that companies don’t have an allowance for interest in the way that individuals do. Moreover, companies typically have to pay bank charges on their bank accounts, whereas individuals normally do not.  

Again, it’s best to seek professional advice from an accountant. They can help you manage your finances in the most tax-efficient manner.  

Thanks for reading

We hope this post has clarified the potential tax benefits of forming a limited company and helped you decide whether it’s the best structure for your needs.

If you have any questions or would like to speak to us about setting up a company, please comment below or contact our London-based team on 020 3897 2233.