The Ultimate Guide to Limited Companies

A limited company is a business with a separate legal identity from its owners (shareholders) and managers (directors), limiting personal liability to the shareholders’ initial investment. Unlike sole traders, it can enter contracts, employ staff, and handle debts in its own name, protecting personal assets by offering distinct separation.

What does ‘limited’ company mean?

A limited company is a type of business with a distinct legal identity, separate from those who own it (the shareholders) and those appointed to manage it (the directors). It is a business structure that restricts the liability the company’s owners are exposed to.

The ‘limited’ refers to the legal protection that shelters the shareholders of a business against personal liability from the debts and liabilities of the business. As a limited company is a legally distinct entity, with finances separate from its shareholders, the shareholders’ assets are not at risk should the firm face financial difficulties or legal issues.

This is different from sole traders who do not have a legal distinction between the owner and the business itself. This is one of the key reasons limited companies are so popular with contractors. Unless there is fraud or serious wrongdoing, the amount you risk losing is restricted to the capital initially invested (the nominal value of shares held).

In the U.K., there are three types of limited company: (i) private company limited by shares, (ii) private company limited by guarantee, and (iii) public limited company.

Limited by Shares

A private company limited by shares is the most popular structure, designed for those wanting to run a for-profit business. It is the structure used by UK contractors. Ownership of the company is divided into shares and distributed between shareholders. Each shareholder’s percentage of ownership and voting rights depends on the value of the shares they own. Profits are distributed to shareholders in the form of dividends, paid out in relation to each individual’s percentage of ownership. If you own 50% of the shares, you receive 50% of the profits.

Limited by Guarantee

A private company limited by guarantee is commonly used by those wanting to set up a ‘not-for-profit’ organisation or charity. There are no shareholders in companies that are limited by guarantee. Instead, they are owned by ‘guarantors’ (also known as members). These guarantors agree to pay a fixed amount of money to the company if it cannot meet its financial obligations. Any surplus income is reinvested in the business rather than withdrawn as profit.

Public Limited

As in a private limited company, a public limited company is divided into shares. The difference is that a public limited company can offer their shares to the general public, whereas a private limited company cannot. This structure is rarely found in new businesses and never found in contractor-owned businesses. It’s more likely to be found in larger, more established companies which have reached a specific size and decided to ‘go public’.

A personal services company (‘PSC’) is simply another name for a private company limited by shares that has been set up by a contractor to provide their services to clients. They’re most often used in Outside IR35 arrangements, with the company acting as an intermediary between contractor and client. In most situations, the company is owned 100% by the contractor; they are the sole shareholder and director.

Advantages and disadvatages of a limited company

Limited companies are popular because they provide financial security, allow for the easy transfer of ownership, and often come with certain tax advantages, especially for growing businesses. However, they also require formal registration and are subject to more regulation and reporting than sole proprietorships or partnerships.

The most significant advantage of a limited company for most people is limited liability. However, there are many additional benefits to working through a limited company, including:

Very few disadvantages of the limited company structure could convince you not to incorporate your business.

Contractors and limited companies

As a UK contractor, you may read the above and understand why, in principle, business owners usually decide to operate via limited companies. But why do contractors specifically prefer this type of business structure?

In addition to the above, if you want to work on Outside IR35 contracts, you often have no choice but to provide your services via a limited company. Due to the rules around IR35 and sole traders, almost all agencies and end-hirers will refuse to work with sole traders.

Deciding between a limited company or sole trader depends on your priorities. Limited companies offer limited liability, tax efficiency, and enhanced credibility but require more administration. Sole traders provide simplicity and direct control but involve personal liability for debts and higher taxes as profits grow. Choose based on your business goals and risk tolerance.

What is a sole trader?

A sole trader is a self-employed individual who is the sole owner of their business. There are no shareholders to pay dividends to or directors to help manage the day-to-day operations. As a sole trader, there is no distinction between yourself and the business; you are considered the same entity. You have absolute control over how the business is run and are entitled to keep 100% of the profits.

Due to the lack of a separate legal identity, you are personally responsible for the business’s financial obligations. If you do not pay your debts, the creditors you owe money to can take action against you directly.

Legal structure

Taxation

Administration

Professional Image

Profit Retention

Summary

A limited company is an excellent choice for business owners seeking limited liability, enhanced credibility, and access to funding. It’s also well-suited for businesses planning for long-term growth or succession, or those in high-risk industries. However, it requires a commitment to regulatory compliance and greater administrative effort.

A sole trader structure is ideal for those prioritising simplicity, privacy, and direct control. It’s often the best choice for freelancers, consultants, or small business owners just starting out, especially when the business involves minimal financial risk and doesn’t require external investors.

Most contractors work through limited (or umbrella) companies as they don’t have a choice. Many clients and agencies refuse to work with sole traders due to issues caused by the tax legislation.

Incorporating a limited company in the UK is a quick and accessible process that can be completed entirely online through Companies House. While it’s generally simple, some steps may seem unclear to first-time business owners.

Initial admin

Start by visiting the government website, clicking “Register now,” and confirming you are starting a new application. Confirm that you can pay the fee via card or PayPal, which is an allowable business expense, or prepare to use Form IN01 if these options aren’t available. Indicate whether any directors or persons with significant control (PSCs) require secure register protection, which is typically unnecessary for most individuals.

Next, create a Government Gateway user ID by entering your email address, confirming it with a code, and providing your full name. Create a password and save your 12-digit user ID for future use. Sign into your account, select “Organisation” for account type, and set up additional security if prompted, such as receiving a text message with an access code. Finally, confirm the email address to be used for updates and application correspondence.

Select your relationship to the company

When incorporating a limited company, your relationship to the company could be one of the following:

Most individuals reading this guide (including contractors) should select Company Director.

Will the company be limited by shares or limited by guarantee?

Whether a company will be limited by shares or limited by guarantee depends on its structure and purpose.

A company limited by shares has shareholders whose liability is limited to the amount unpaid on their shares. This is common for most businesses aiming to make a profit, such as private limited companies and public limited companies. Shareholders’ liability is limited to the amount they have agreed to pay for their shares, meaning they are not personally responsible for the company’s debts beyond that amount. This is the chosen structure for UK contractors.

A company limited by guarantee does not have shareholders but instead members who agree to contribute a fixed amount (the guarantee) in the event the company is wound up. This structure is often used for non-profit organisations, charities, or clubs where the members do not seek to share profits.

Will the company be limited by shares or limited by guarantee?

Whether a company will be limited by shares or limited by guarantee depends on its structure and purpose.

A company limited by shares is the chosen structure for UK contractors.

Enter your company name

When choosing a company name for incorporating a limited company in the UK, there are several key considerations and legal requirements:

Many UK contractors simply use a variance on their surname as their limited company name, for example Smith IT Services Ltd.

Enter the company’s registered office address

A company’s registered office address is its official address. This address is used for receiving statutory correspondence, legal notices, and official communications from entities like Companies House and HMRC. It must be a physical location within the same jurisdiction where the company is registered and is publicly accessible. This means that it appears on the public register and is available for public inspection.

The registered office address does not have to be the company’s principal place of business. Many companies opt to use the address of an accountant, solicitor, or a registered office service provider to maintain privacy.

It’s important to note that the registered office address must be ‘appropriate,’ meaning that documents sent to this address should be expected to come to the attention of a person acting on behalf of the company, and any documents sent to that address can be recorded by an acknowledgement of delivery.

Additionally, as of March 2024, new regulations stipulate that a registered office address cannot be a PO Box and must meet the ‘appropriate’ criteria. If Companies House determines that a company’s registered office address is not appropriate, they may change it to a default address and potentially initiate the strike-off process if the company fails to provide a suitable address within the given timeframe.

As a contractor, if you don’t want your home address made public, you can use a registered office provider.

Select the company’s ‘principal place of business’.

A company’s principal place of business refers to the main location where its core activities are conducted and where key management decisions are made. It’s important to differentiate the principal place of business from the registered office.

The registered office is the official address recorded with government authorities, used for receiving legal documents and official correspondence. While the registered office can be a different location, the principal place of business is where the actual business operations and management occur.

For a contractor, the principal place of business will usually be their home address, where administrative task (such as bookkeeping) are performed and where decisions as to whether to accept a role are made.

This could be different to their registered office that could be at their accountant’s workplace, or the address of a registered office provider.

What will the company be doing?

SIC codes, or Standard Industrial Classification codes, are a system used to classify businesses by their primary activity. They provide a way of identifying the nature of a company’s operations, making it easier to categorise businesses within a particular industry or sector. These codes are used by government agencies, regulators, and statistical organisations to track and report on industry performance, as well as for regulatory and tax purposes.

The SIC system divides businesses into broad categories, which are further subdivided into more specific codes. For example, a company involved in manufacturing might fall under a general category for manufacturing, but its specific activity—like the production of electronic equipment—would be assigned a more detailed SIC code.

When registering a company, choosing the correct SIC code impacts a business’s eligibility for certain regulations, funding opportunities, and tax structures. It’s advisable to choose the most accurate code that represents the primary activity of your business.

For UK contractors, finding the ‘perfect’ SIC code is not necessary. If the code broadly reflects the services you provide, you shouldn’t have any issues. And remember, amending the code for your company after you’ve registered is a relatively simple process.

A full list of codes can be found here.

Set up the shareholders

When setting up the company’s shareholders you will be asked: (i) who the shareholders are, (ii) what type of shares they own, (iii) how many shares they own, and (iv) what value the shares hold.

Who are the shareholders?

You can add as many shareholders as you want, however for most contractors this will usually just be themselves. If you’d like to add a spouse, you can do so at this stage.

What types of shares do they own?

When registering a limited company in the UK, you may be asked if you want to use the “most common type of shares.” This question refers to the type of shares that your company will issue to its shareholders. The most common type of shares for a limited company in the UK are Ordinary Shares.

Ordinary shares represent the basic form of equity ownership in a company. When a company is incorporated, the owners (shareholders) are allocated shares in exchange for their capital investment. Ordinary shares come with certain rights and responsibilities, which include voting rights. Shareholders with ordinary shares usually have the right to vote on major company decisions at shareholder meetings, such as electing directors or approving business strategies.

Ordinary shareholders are also entitled to receive dividends if the company distributes profits, though these dividends are not guaranteed. They are typically paid out after any preferred shareholders have been compensated. Ordinary shareholders benefit from the company’s profits through potential dividend payouts and capital gains when the value of the company increases. However, in the event of liquidation, they are the last to receive any remaining assets after creditors and other preferred shareholders have been paid.

When you are asked whether you want to use the “most common type of shares,” it typically means that the company is being set up with Ordinary Shares, which are the most widely used and standard form of shares for UK limited companies. This is usually the preferred choice for most small businesses and contractors.

However, if your business has specific needs, such as raising capital or managing control, you might choose a different class of shares, but this will require additional planning and legal considerations.

How many shares do they own?

Every limited company in the UK has a share capital, which represents the ownership of the company. The company is divided into shares, and each share represents a unit of ownership in the business. The total value of shares issued represents the company’s initial capital.

A shareholder’s ownership in the company is determined by how many shares they own out of the total shares issued. For example, if the company issues 100 shares, and you are allocated 50 shares, you own 50% of the company. When forming the company, the initial shareholders decide how many shares they will each own. This decision will be based on agreements between the founders or investors regarding ownership percentages, funding contributions, and control of the company.

This question essentially asks you to decide and specify how many shares each shareholder owns when registering the company, determining their stake in the company, including voting rights, dividend entitlement, and overall ownership percentage. The number of shares you allocate to each shareholder should be based on your company’s share structure, which you’ll define when setting up the company.

If you are the only shareholder, you’ll own 100% of the company regardless of how many shares you choose. You only need to choose more than one share if you want to split ownership with others in future, and you can add more shares after the company is registered.

What value do the shares hold?

When registering a limited company in the UK, the question “Choose a value for each share” asks you to determine the nominal value (or face value) of each share issued by the company. This value is the amount assigned to each share when the company is created and represents the legal value of the share.

The nominal value is important because it helps define the company’s share capital, which is the total value of all the shares issued by the company. This value is not necessarily the price at which the shares will be bought or sold, but rather a legal designation used for registration purposes.

In the UK, the nominal value for shares is typically set at a low value, often £1 or less, but it can be any amount (subject to the company’s articles of association). For example, if you decide that each share has a nominal value of £1 and you issue 1,000 shares, your company’s share capital would be £1,000. The value you choose doesn’t impact the market value or the price at which shares might be sold to investors in the future, it is simply a legal number that is used when registering the company.

In practice, many small companies choose a nominal value of £1 per share because it simplifies calculations and keeps the share capital low. If you plan to issue a large number of shares to many people, you may choose a lower value, such as 0.01p (one penny) per share, which increases the flexibility in dividing the share capital.

In summary, choosing a value for each share determines the nominal value of the shares issued by the company and helps define the company’s share capital. This value is usually set at a low number, such as £1, and is a key part of the company’s incorporation process.

Most UK contractors will be the sole shareholder of their limited company. If this is the case, choosing 1 share at a nominal value of £1 is the simplest option.

Persons with significant control

When registering a limited company in the UK, the step “You’re about to set up the ‘Persons with Significant Control’ (PSC) over the company” refers to identifying and recording the individuals or entities that have significant control or influence over the company. This requirement is part of the UK government’s effort to increase transparency and prevent the misuse of corporate structures, such as for money laundering or tax evasion.

For most UK contractors, they will be the only PSC in their limited company.

Articles of Association

In the UK, when registering a limited company, the Articles of Association are a crucial legal document that outlines how the company operates. These articles define the rules and regulations for managing the company, such as the duties of directors, the rights of shareholders, and the procedures for making decisions. The government provides Model Articles of Association, which are standard rules applied by default if the company does not choose to adopt its own custom articles.

The Model Articles address key elements necessary for the operation of the company. They outline the company’s purpose, which is typically broad, allowing for any lawful business activity unless the articles specify otherwise. The Model Articles also establish the governance of the company, detailing the process for appointing, removing, and empowering directors, including how decisions are made and how many directors are needed.

These Model Articles are designed to suit most private limited companies, offering a simple and clear framework for governance. However, companies can choose to modify or replace them with their own custom articles if they have specific needs.

You might choose to replace the Model Articles of Association with custom articles if your company has specific needs that the standard rules do not address. While the Model Articles work for most businesses, custom articles are useful if you have unique shareholder arrangements, such as different classes of shares, or need more detailed governance provisions, like voting rights or share transfer restrictions. If you require tailored director provisions, like limiting the number of directors or decision-making processes, custom articles can help. For family-run businesses, custom articles provide more control over share ownership and transfers. Additionally, some industries may need specific rules around operations, such as shareholder loans or dividend distribution. If you plan to raise capital in the future, custom articles can define share issuance, investor rights, and control mechanisms.

For most UK contractors, the Model Articles of Association are fit for their needs.

Final stages

The final three stages of registering a limited company in the UK are as follows:

Bank Accounts

According to the Companies Act 2006, it is a legal requirement for a limited company to have a bank account. The bank account must be registered to the limited company; it can’t be registered under the name of its directors or shareholders. If you’re a contractor that has recently incorporated a limited company with Companies House, you must open a business bank account before you start trading and making/receiving payments.

As a limited company contractor, one of the ‘challenger’ banks like Starling, Monzo or Mettle is usually your best option. They offer free accounts, payment notifications, and integration with accounting tools like Xero. Mettle offers access to FreeAgent at no cost.

Limited companies in the UK are subject to Corporation Tax, VAT, and PAYE. Corporation Tax is paid on profits, VAT applies to taxable turnover above £90,000, and PAYE covers Income Tax, National Insurance, and student loan repayments. Deadlines, registration requirements, and penalties vary, requiring careful compliance and record-keeping.

Corporation Tax

Corporation Tax is a tax limited companies pay on their business profits. It is calculated by taking the business’s revenues, deducting allowable expenses (including salaries), and multiplying by the corporation tax rate.

Value Added Tax (VAT)

VAT is a consumption tax charged on most goods and services in the UK. Limited companies act as intermediaries, collecting VAT from customers on behalf of HMRC. VAT applies at each stage of the supply chain, but businesses can reclaim the VAT paid on their purchases, making it a tax primarily borne by the end consumer. The VAT system ensures transparency, with businesses acting as tax collectors rather than bearing the tax burden themselves.

In addition to these rates, some items are exempt from VAT (e.g., insurance, financial services, and certain healthcare services) or are outside the scope of VAT (e.g., donations to charities). Understanding the distinction between these categories is critical for compliance and accurate record-keeping.

There are two VAT schemes you can choose from:

VAT calculations must include only VAT-eligible items. Items exempt from VAT or outside the scope of VAT are excluded from these calculations. Accurate record-keeping is essential to ensure that you pay the correct amount of VAT and avoid penalties.

PAYE

PAYE (Pay As You Earn) is HMRC’s system for collecting Income Tax and National Insurance Contributions from employee salaries before they receive their net pay. This system is designed to ensure that employees and directors pay the right amount of tax and contributions throughout the tax year, minimising the risk of underpayment or overpayment.

Most contractors do not need to worry about the apprenticeship levy as it only applies to employer’s with an annual wage bill over £3 million.

Contractors that are the sole director and employee of their limited company must still register for PAYE if they intend to pay themselves a salary.

Payroll software simplifies these calculations, ensuring compliance with tax bands, thresholds, and contribution rates.

Self-Assessment

If you intend to pay a dividend from your limited company, you must register for self-assessment. Self-assessment is the system HMRC use to collect individual taxes owed that are not taxed at source (e.g. via PAYE).

All UK limited companies must have at least one director. The initial director, or directors, are appointed during the company formation process; however, these company offices can be changed at any time by notifying Companies House.

Although you don’t need to be a shareholder of the business to be a director, in practice, many limited company directors are sole directors and owners of their limited company. This arrangement is particularly prevalent with contractors working Outside IR35.

Important dates

When running a limited company, it’s important to understand the difference between your accounting reference date (set by Companies House) and your accounting period (set by HMRC). These dates determine your company’s financial year, filing deadlines, and how long your accounts cover, particularly in the first year after incorporation.

Filing responsibilities

Running a limited company comes with several statutory filing responsibilities, covering financial accounts, tax returns, and company records. These obligations apply whether your business is trading or dormant and include filings with both Companies House and HMRC. Meeting these deadlines is essential to remain compliant and avoid penalties.

Maintaining appropriate records

A limited company director has a legal obligation to maintain appropriate company and accounting records. These records must be kept for six years from the end of the last company financial year they relate to. There are no rules on how you must keep records. You can keep them on paper, digitally or as part of a software program. HMRC can charge you a penalty if your records are not accurate, complete, and readable.

Role of an accountant

Although the responsibilities of a limited company director can seem daunting, most of the administrative tasks are usually done by a specialist accountant. An accountant will stay on top of relevant deadlines, calculate and submit returns and statements, and keep Companies House informed regarding any changes.

That said, despite the accountant doing most of the work, the ultimate responsibility for ensuring all statutory requirements are met rests with you as a director. If a deadline is missed or a mistake is made, the burden ultimately rests with you.

Limited company insurance is essential for protecting businesses from potential risks and liabilities. Tailored specifically for limited companies, this coverage includes public liability, professional indemnity, and employer’s liability insurance. Choosing the right policy can ensure you safeguard your business assets, ensuring peace of mind and operational security.

What insurance is legally required?

The necessary limited company insurance policies vary depending on your industry. However, few individual insurance policies are legally required.

Employer’s liability insurance is the only mandatory business insurance, and even then, it only applies to those companies with employees. If you are operating as a sole director/employee (as most contractors do), then the policy is unnecessary.

If your industry carries a level of risk, some regulatory bodies may stipulate the need for a particular type of insurance policy, such as professional indemnity cover. Although not legally required, most Outside IR35 contracts usually stipulate a certain level of professional indemnity insurance that the contractor’s limited company must hold. Without this cover in place, you will not be able to start the contract.

Most contractors also take out additional insurance to give them peace of mind. Contracting is hard enough without worrying about significant financial repercussions against your limited company should a mistake be made.

Furthermore, many of the policies available are allowable expenses, allowing you to put the cost through your limited company and reduce your Corporation Tax liability.

Professional Indemnity Insurance

Professional indemnity insurance protects against circumstances where a mistake in your services causes a third party a financial loss. It is the most common limited company insurance, and one most contractors choose to take out.

It covers situations such as: negligence or breach of duty, infringement of intellectual property rights, sharing confidential information without permission and mistakes made by sub-contractors. Policies tend to cover legal defence costs and any liability up to the indemnity limit.

Although not a legal requirement, almost all Outside IR35 contracts will stipulate a certain level of professional indemnity insurance required before the contract can begin. Costs start from around £150 per year and are an allowable business expense.

Costs start from around £150 per year and are an allowable business expense.

Public Liability Insurance

Public liability insurance covers you for the defence costs and associated liability arising from situations where you have caused injury or property damage to a third party while providing your services. The third-party in question does not have to be your client; they can be a member of the general public who has allegedly suffered a loss due to your actions.

Public liability insurance is uncommon among limited company contractors operating the professional services or IT fields. It is more common for contractors working outdoors, like tradespeople and landscapers.

Costs start from around £60 per year and are an allowable business expense.

Employer’s Liability Insurance

Employer’s liability insurance covers you in the event of a compensation claim by an employee where they have suffered injury, illness or accidental death due to their employment. It is legally required if you have employees and unnecessary if you do not.

For contractors, if you are the director of your limited company, are the sole employee and own more than 50% of the shares, you are exempt.

Costs start from around £60 per year and are an allowable business expense.

Jury Service Protection

Jury service is a policy designed specifically for limited company contractors. If you’re called to jury service, you won’t be able to work and earn money. This policy will provide a fixed amount per day (based on the value of your contract at the time) to make up for this loss of earnings. Costs start from around £40 per year and are an allowable business expense.

Tax Investigation (including IR35) Insurance

If HMRC opens an inquiry into your finances or accounts, tax investigation policies will protect you. Depending on the level of cover, it will respond to a broad range of investigations, be they PAYE compliance review, VAT dispute, IR35 inquiry or others.

Policies usually cover the costs of an investigation (including hiring a legal representative to defend you in court) and any liabilities and penalties should ‘wrongdoing’ be discovered. After professional indemnity insurance, tax investigation cover is one of the most popular policies with limited company contractors due to the peace of mind it provides.

Costs start from around £200 per year; however, whether the expense is allowable can be confusing.

According to HMRC , tax investigation insurance is only allowable if it doesn’t cover any additional liabilities owed should an investigation go against the contractor, and the contractor wins any investigation.

This means that if the policy covers any tax, interest or penalties arising from the loss of a case, or HMRC’s investigation finds wrongdoing, the policy is not allowable as a business expense.

Sickness Cover

Sickness cover protects you if an accident or illness prevents you from working. It provides a weekly or monthly payment for a set period, the amount of which is dictated by your contract rate. Costs start from around £300 per year and are an allowable business expense.

Contractors’ All Risk Insurance

Contractor’s all risk insurance is designed for tradespeople and subcontractors, protecting your business against loss or property damage which is being used, or intended for use, in connection with your work on a construction site. It is not relevant for those who do not work on construction sites. Costs start from around £100 per year and are an allowable business expense.

Personal Accident

Personal accident insurance provides a lump sum payment if you suffer an injury because of an accident in the workplace. It is not very common for those who work ‘desk jobs’; it is common for those who work with an element of danger, such as engineers who work off-shore. Costs start from around £60 per year and are an allowable business expense.

Life Insurance

Life insurance provides your dependents with a lump-sum payment based on a multiple of your income in the event of your untimely death. It provides for your family and helps pay off any outstanding debts, such as the mortgage.

It surprises many contractors, but life cover can be put as an allowable expense through your limited company so long as you take an earning form the company (salary or dividend).

Costs start from around £150 per year and are an allowable business expense.

Medical and Dental Insurance

Private medical or dental insurance covers the costs of private healthcare and dental work, from diagnosis to treatment. Medical and dental insurance are not allowable as limited company expenses. If they put through your limited company, they will count as a benefit in kind, and you will incur additional tax liabilities.

Most large insurance providers will provide policies catering for the freelance workforce; however, you may be best going through a contractor specialist such as Qdos or Kingsbridge.

Claiming expenses as a limited company reduces your taxable profit and lowers your Corporation Tax liability. Allowable expenses include travel, equipment, salaries, and insurance, provided they meet HMRC’s “wholly and exclusively” rule. Accurate record-keeping, receipts, and proper apportionment for mixed-use items ensure compliance and maximise legitimate claims.

How to claim expenses

As a limited company owner, claiming allowable business expenses reduces your ‘profit-before-tax’. This, in turn, reduces the amount of Corporation Tax owed to HMRC. More allowable expenses mean less taxable profit and a lower tax liability.

You can either pay your limited company expenses directly from your business account or pay them personally and have the company reimburse you. Any employees you have are also allowed to claim expenses, so it’s essential to establish clear guidelines regarding how much they’re allowed to spend and when. You must file all expense claims regularly, and your employees must record all expenses with receipts.

Maintaining accurate records of your limited company expenses is critical. It is also advisable to keep all invoices and receipts in case HMRC decide to query a particular claim; you may need to prove it is a legitimate business expense.

If you have regular business expenses or have employees claiming expenses, it may be worth investing in expense management software. The software dramatically simplifies the expense tracking process.

‘Wholly and exclusively’

For an expense claim to be ‘allowable’, it must be incurred ‘wholly and exclusively’ for the purposes of business. The terms ‘wholly’ and ‘exclusively’ are designed to prohibit expenditure that serves a dual purpose, a business purpose, and a non-business purpose.

An example of dual-purpose expenditure is money spent on ordinary clothing worn at work. Clothing worn both in and out of work obviously has a dual purpose, so no deduction is allowed. Expenses that serve a dual purpose may be allowable in two circumstances:

What expenses can be claimed?

As a limited company owner, claiming allowable business expenses reduces your ‘profit-before-tax’. This, in turn, reduces the amount of Corporation Tax owed to HMRC. More allowable expenses mean less taxable profit. We’ve outlined some common expenses you can claim as a limited company director:

Trivial benefits

Trivial benefits are small, non-cash perks that businesses can provide to employees, including directors, without incurring tax or National Insurance liabilities. To qualify, the benefit must cost £50 or less per instance, not be given as a reward for work or performance and not be part of an employee’s contractual entitlement. It cannot be cash or a cash-equivalent that can be exchanged directly for cash, but gift cards are allowed if they meet the cost limit.

For directors of close companies (most contractors meet this definition), the total value of trivial benefits is capped at £300 per tax year. These benefits are intended for minor, irregular gestures like gifts or tokens of appreciation rather than routine payments or significant rewards. Examples include birthday or holiday gifts, flowers, or small vouchers, provided they follow the rules.

Contractors can give themselves six £50 gift vouchers. These vouchers are tax deductible, and don’t incur any additional Income Tax.

What expenses cannot be claimed?

As a limited company owner, claiming allowable business expenses reduces your ‘profit-before-tax’. This, in turn, reduces the amount of Corporation Tax owed to HMRC. More allowable expenses mean less taxable profit.

There are a few costs that are commonly thought of as allowable business expenses when, in fact, they’re not:

Working from home

To claim for use of home as office expenses, you must undertake substantive duties relating to the main trade of your business at home. HMRC allow a flat rate claim of £6 per week for home expenses without keeping receipts. This is suitable for the ‘kitchen table’ home worker, who only occasionally works at home in a space that serves some other purpose (such as the kitchen).

If you are a dedicated home worker who regularly works from home in a defined space, you can claim more than the £6 per week if you know what you’re doing. You’ll need to clearly separate business usage from private usage.

HMRC will accept most reasonable apportionment methods, providing they are based on usage. This could be area (what proportion in terms of area of your home is used), usage (how much is consumed) or time (how long is it used for business purposes).

Rent and mortgages

Limited company directors who work from home can charge the company rent for the room in which they work. If you’re renting, this is calculated as a percentage of your rent. If you have a mortgage, this is calculated as a percentage of your interest payments, it does not cover capital repayments.

You must draw up a formal rental agreement between you and the business, and all rental income must be included on your tax return. The amount of rent you charge the limited company must be on an ‘arm’s length’ basis, meaning it must be realistic in commercial value. You cannot calculate an amount designed to benefit you as an individual.

Your rental agreement can also be used to cover the proportional costs of the rented space, meaning you can include items such as utilities and council tax based on the proportion of the property used for business purposes. A practical way is to look at the total costs you want to claim and divide that by the percentage of rooms used for business purposes.

It’s important to note that owning your house and having a room solely dedicated to your business could have additional implications when you decide to sell your home. You may need to pay capital gains tax on the business part as it will not qualify for Private Residence Tax Relief.

Useful HMRC links

• Expenses if you’re self-employed

• Expenses and benefits: A to Z

• Business records if you’re self-employed

• Wholly and exclusively: overview

• Other expenses: working from home

Purchasing or leasing a car or van through a limited company offers tax benefits, such as capital allowances, deductible lease payments, and VAT recovery. Vans qualify for more favourable tax relief than cars, while electric vehicles benefit from 100% First Year Allowance and reduced benefit-in-kind rates, making them a tax-efficient choice.

Cars

How you pay for your new business car will determine the tax allowances you can claim. If the car is leased, the monthly lease payments are allowable as business expenses.

You can check your car’s CO2 emissions here.

Vans

Unlike cars, vans are classified as plant and machinery for tax purposes, so they qualify for the Annual Investment Allowance. This means that if you purchase a van through your limited company, you can deduct 100% of the cost as an allowable expense in the year of purchase, reducing your business’ Corporation Tax charge. You can also claim the full VAT on the purchase price.

If you decide to lease instead of purchase, you can’t claim capital allowances as you do not own the vehicle. Instead, the lease payments, interest charges and VAT are allowable expenses. Given the tax relief for vans is more generous than for cars, you must ensure the vehicle you’re purchasing is classed as a van by HMRC. Broadly, a ‘van’ is any ‘goods vehicle’ that is not a motorcycle and weighs no more than 3.5 tonnes when fully laden.

As with cars, any private use will be classified as a ‘benefit in kind’.

Capital assets are significant purchases like equipment or vehicles used over the long term in a business. Unlike regular expenses, they qualify for tax relief through capital allowances, such as the Annual Investment Allowance, which reduces taxable profits. Properly accounting for capital assets ensures compliance and minimises tax liabilities.

What are capital assets?

Most day-to-day expenses you incur running your business are typically offset against profit, reducing Corporation Tax. Not all costs are allowable for tax purposes, though. Items that have a long-lasting benefit to the company are known as ‘capital assets’ (or ‘fixed assets’) and are accounted for differently.

‘Capital assets’ describes significant purchases used for an extended period (usually longer than a year) and not sold as part of your regular business operations. They can include equipment such as machinery, cars, vans, or even intangible items such as an expensive piece of software paid for upfront rather than by subscription.

The size of your business is a factor in determining whether an expense is defined as ‘capital’ or not. For smaller businesses, spending £750 on a computer could be a significant enough purchase to qualify it as a capital asset. For a larger company, this would usually be considered a regular expense.

Capital assets are treated differently from day-to-day expenses in terms of tax and accounting. Failure to treat them correctly may mean you pay more tax than is necessary.

What are capital allowances?

Due to the long-term nature of capital assets, they go on the balance sheet, and the decrease in the value of these assets over time is known as depreciation. Depreciation can be thought of as an ongoing, regular expense. Every year, part of the asset’s value is deducted from your business’ profits.

Depreciation is an accounting concept that spreads the cost of the assets you purchase over the period you use them.

HMRC does not consider it an allowable expense, so you have to add back any depreciation charges when calculating taxable profits. HMRC instead grants relief in the form of capital allowances.

Capital allowances provide tax relief for the reducing value of certain capital assets by writing off their costs against your business’ taxable income. There are several capital allowances, each with different rules regarding what relief you can claim.

A benefit in kind is a non-cash perk of monetary value provided by an employer to employees, such as company cars or private health insurance. Most benefits in kind are taxable, treated as income, and subject to National Insurance Contributions. They are reported via P11D forms and must meet specific tax compliance rules.

What is a benefit in kind?

A benefit in kind is any non-cash benefit of monetary value provided by a company to an employee that isn’t ‘wholly and exclusively’ for the purposes of the business. They are often called ‘perks’, ‘fringe benefits’ or ‘notional pay’.

For example, if a travelling sales rep or delivery driver were provided with a vehicle to help them perform their duties, HMRC would consider the vehicle essential to their work and, therefore, not a benefit in kind. If the same vehicle were provided to an employee who does not need to travel, it would not be seen as entirely necessary for work, so it would be considered a benefit in kind.

Companies use benefits in kind to reward employees over and above paying their wages and bonuses. The rewards have a monetary value attached, so they are treated as taxable income.

Given the broad definition of benefit in kind, it is impossible for HMRC to maintain a complete list, although they do provide an overview of some of the more common examples.

Given the limited number of benefits that are non-taxable, HMRC maintain a more complete list.

Although there are many different types of benefits in kind, they all fall into two categories: (i) taxable and (ii) tax-free. Most benefits in kind are taxable to prevent employees from circumventing their Income Tax liabilities. If they weren’t taxed, employers could reduce an employee’s salary and replace it with a tax-free benefit.

HMRC, therefore, effectively considers benefits to be cash equivalents contributing to your income. As such, they are considered taxable earnings and subject to Income Tax and National Insurance Contributions.

How do I calculate what tax I need to pay?

There are different rules on what kind of tax must be paid, depending on the benefit and how it has been administered. In general, benefits in kind can attract Income Tax and both Employee and Employer National Insurance Contributions.

Contractors and Benefits in Kind

Contractors working Inside IR35 via an umbrella company are employees of their umbrella company. While technically possible, umbrella companies do not offer additional benefits due to the costs involved. Benefits in kind are, therefore, only relevant to contractors working Outside IR35 via their own limited company.

If you are a contractor who runs your own limited company, benefits in kind are not tax-efficient as they incur both Income Tax and Employer NI Contributions. While you may save on the Corporation Tax, this is more than offset by the additional Income Tax and National Insurance payments.

Therefore, paying any private costs (such as medical insurance or gym membership) out of your after-tax income is more efficient than through your limited company.

In addition to the above, contractors need to be conscious of their director’s loan account. If you withdraw money from your limited company via the director’s loan account, and the total balance of money owed is over £10,000, then the total amount will be classed as a taxable benefit in kind.

Contractors working Outside IR35 via a limited company have two options for contributing to their pension: (i) via a workplace pension scheme and (ii) via a SIPP. Most opt for SIPPs due to their flexibility and tax efficiency, allowing contributions of up to £60,000 annually directly from company profits, reducing Corporation Tax and avoiding National Insurance.

Workplace Pension Scheme

A workplace pension scheme is organised by the employer. All employers must legally enrol eligible candidates in the scheme unless they opt out. Once registered, you will be subject to a minimum contribution of 3% of your monthly gross salary.

As a contractor working through a limited company, you can apply to the Pensions Regulator for an exemption if you’re the company’s only director and employee. If you don’t apply for the exemption, your company must set up a workplace pension and make employee and employer contributions on your behalf.

If the company has two or more directors, none may have an employment contract to qualify for the exemption. Therefore, if you currently employ your spouse via your limited company, you must register them with a workplace pension scheme, although they can opt out.

Due to the inflexible nature of workplace pension schemes, most limited company contractors choose to take the exemption and instead contribute via their SIPP. A much more flexible option.

In addition, workplace pension schemes often come with high charges. Take the Government’s scheme, NEST, as an example. They charge 1.8% on every contribution and a 0.3% annual management fee. While the 0.3% fee is broadly in line with the industry average, the 1.8% contribution fee is steep. Plenty of Target Retirement Funds charge nothing to contribute and lower ongoing costs. See Vanguard’s Target Retirement* as an example.

* The Vanguard Target Retirement merely illustrates the high fees charged by workplace pensions; it is not advice or a recommendation to invest.

Self-Invested Personal Pension (SIPP)

A SIPP is a type of pension that gives you more control and flexibility over how much is invested and what it is invested in (funds, shares, ETFs, Investment Trusts, etc). With a SIPP, you manage your own investments and can make changes and additions as often as you want.

There is no minimum contribution; you can increase, decrease, or even stop your contributions altogether if you’re not working.

For most contractors, this flexibility and range of choice is why most invest in a SIPP instead of a workplace pension scheme.

You can open a SIPP in as little as 15 minutes, either with a bank payment or by transferring an existing pension. Most SIPP providers (such as interactive investor, Hargreaves Lansdowne or AJ Bell) will walk you through the process.

Can I contribute to my SIPP via my limited company?

Yes, you can contribute to your SIPP via your limited company. Contributing to your SIPP is an excellent way of saving for retirement and a tax-efficient way of using your business’s profits. The company’s contributions to your pension are allowable expenses, meaning you reduce your taxable profits and, therefore, your Corporation Tax liability.

Another benefit of making employer pension contributions via your limited company is that employer pension contributions are not subject to National Insurance.

How much can I contribute?

Your annual allowance limits the pension contributions that can be made to all your pension schemes in a tax year (06 April to 05 April) before you have to pay tax on them. The current annual allowance is £60,000.

Provided the pension contributions meet HMRC’s ‘wholly and exclusively test’, and the amount doesn’t exceed the company’s income for the year, you can contribute the entire £60,000 into your SIPP via your limited company. You can contribute more to your SIPP; however, the contributions would be subject to Income Tax, negating any benefit.

If you use all your annual allowance for the current tax year, you may be able to carry over any annual allowance you did not use from the previous three tax years. You could contribute up to £240,000 in a single year, £60,000 for this year and £60,000 for the last three years. You can use HMRC’s calculator to check whether you have any unused allowance to carry forward.

Similar to the tapering of the personal allowance for incomes above £100,000, you’ll have a reduced annual allowance in the current tax year if your threshold income is over £200,000 and your adjusted income is over £260,000.

Threshold income is broadly defined as an individual’s taxable income for the year (salary, bonus, dividend income, interest distributions, etc). Adjusted income takes threshold income and adds employer pension contributions. This prevents individuals from avoiding restrictions by exchanging salary for employer contributions.

Where both thresholds have been breached, the rate of reduction in the annual allowance is £1 for every £2 the adjusted income exceeds £260,000, down to a minimum allowance of £10,000. HMRC has detailed instructions on calculating whether you are subject to a tapered annual allowance.

Personal or limited company contributions?

As a limited company contractor, you can pay into your SIPP from your after-tax earnings or directly from the company. If you make payments from your after-tax earnings, you get automatic tax relief at the basic rate of 20%; then you claim back the higher rate (40%) or additional rate (45%) relief via your self-assessment tax return.

If you make payments directly from your limited company, the contributions count as allowable business expenses, reducing the Corporation Tax you pay. You will also save on Employer’s National Insurance (something you can’t claim back if paying out of after-tax income) and Income Tax owed on the extra salary/dividend not taken.

Therefore, paying into your SIPP via your limited company is more tax-efficient than paying from your after-tax earnings.

An additional restriction comes with paying into your pension from after-tax earnings. You are restricted to contributing up to 100% of your annual salary into your pension, with dividends not counting to the limit. If you are a limited company contractor paying yourself mainly dividends and taking a small salary of £9,100, the most you can contribute from your after-tax earnings is £9,100.

You could always increase your salary to increase the limit, but this isn’t necessarily tax efficient. This salary threshold doesn’t apply to limited company contributions, meaning you can keep taking the £9,100 salary and contribute the total £60,000 into your pension.

Contractors and pensions

For limited company contractors working Outside IR35, the most tax-efficient way as a limited company director:

If you’re unsure about any of the above, we recommend speaking to a pension specialist so they can provide bespoke advice tailored to your individual circumstances.

Employing your spouse or making them a shareholder in your limited company can be an effective way to optimise tax savings and share business benefits. However, strict HMRC rules and careful planning are required to avoid challenges. Here’s an overview of the key considerations and strategies to ensure compliance and efficiency.

Employing a spouse

Your spouse can work for you, although you must ensure you run a PAYE scheme. Any Income Tax and National Insurance owed will be paid via PAYE. The wages you pay your spouse are an allowable expense, meaning they’ll reduce the Corporation Tax you owe.

It’s important to note that if you pay your spouse a wage, you should ensure they do some work in the company. If they don’t, their status as an employee could be challenged by HMRC.

What counts as sufficient work to satisfy HMRC is highly subjective; however, it could be anything from submitting invoices to opening mail or helping to maintain accounting records.

If your spouse is not a director of your limited company, and they do not have a specific employment contract, you must pay them at least the National Minimum Wage. If you want to pay your spouse more than the National Minimum Wage, it’s essential to consider the fair market value of their work. The salary should be at a ‘commercial rate’ for the service provided.

Although HMRC does not prescribe a specific wage for individual services, one way to think of this is to consider what you would be willing to pay someone else for doing the same job. If you were to ‘overpay’ your spouse for their work specifically to take advantage of their lower tax rate, it could be classed as ‘income shifting’ and be caught by the Settlements Legislation (more on this below).

The optimum salary to pay your spouse depends on how much they currently earn. If your spouse has made enough to use up their entire personal allowance, there is no benefit in paying them a salary through your limited company.

If your spouse has already used up their personal allowance and you pay them a salary, while you save Corporation Tax, your spouse will have to pay Income Tax at 20%, 40%, or even 45%, depending on their tax band.

If your spouse has no other sources of income, then the optimal salary is £1,047.50 per month, this being the Primary Threshold limit. Although you will incur Employer’s National Insurance, these costs will be less than the Income Tax saved by your spouse.

Does IR35 affect this?

If your contract is Inside IR35, you are limited to the existing profits (earned from Outside IR35 work) from which to pay your spouse. Any income from an Inside IR35 contract is taxed as employment income, so paying your spouse a salary becomes tax-inefficient. There is no Corporation Tax against which to offset the costs, and the salary itself would effectively be subject to double taxation. Once for yourself when earned and once when paid to your spouse.

Making your spouse a shareholder

Many contractors split ownership of their limited company with a spouse or partner to take advantage of the lower tax rates associated with dividends instead of income. By making your spouse a shareholder of your limited company, they become entitled to a proportion of any issued dividend.

The proportion of dividends your spouse is entitled to is calculated by the percentage of shares they own. If there are 100 shares in the company, and you both own 50 shares each, you are both entitled to receive 50% of any dividend issued.

For example, if you, as a contractor, earn over the higher rate threshold, any dividends you receive will be taxed at 33.75%. Splitting this dividend with a spouse with no other income would see them pay tax at the basic rate of 8.75%, a difference of 25%.

This is a particularly effective way to reduce taxes paid to HMRC when your partner has little or no income of their own. As with the salary above, if your spouse or partner has other significant income, there is unlikely to be much of a tax saving by making them a shareholder.

Settlements Legislation and the ‘spousal exemption’?

Contractors considering making their spouse a shareholder in their limited company may have come across the ‘Settlements Legislation’, specifically designed to prevent income shifting. Income shifting involves transferring personal income to another individual who pays tax at a lower rate.

HMRC argued that under the Settlements Legislation, a gift of shares from a fee-earning contractor to a non-fee-earning spouse was a ‘bounteous settlement’ and that any income should continue to be taxed as if it were the contractor’s.

Fortunately for contractors, in 2007, the Court of Appeal ruled that the transfer of shares to a spouse is captured under the ‘spousal exemption’, meaning it is outside the remit of the Settlements Legislation.

Although the court upheld a contractor’s right to make their spouse a shareholder in their limited company, they did so in tightly defined circumstances.

If any of the above criteria are unmet, HMRC may take interest, and the spousal exemption may not apply.

Non-married couples

If you’re married or in a civil partnership and living with your spouse, you can transfer shares in your company to them without incurring any capital gains tax. They will still have to pay Income Tax on any dividends received. If you’re not legally married or in a civil relationship with your partner, transferring part-ownership of your limited company to them will likely incur additional tax liabilities. The spousal exemption will not apply; HMRC could see the transfer as one of value and could seek to charge capital gains tax.

Alphabet shares

When a business pays a dividend, all shareholders receive payment proportionately to their holdings. If you hold 25% of the shares, you receive 25% of the dividend. For one group of shareholders to be paid at a different rate or receive preference over another, the company must have distinct classes of shares with unique rights. This is where alphabet shares come in.

The term ‘alphabet shares’ describes different classes of ordinary shares in a company, often called class A shares, class B shares, class C shares, etc. Each type of share can offer a different entitlement to any dividends paid.

Alphabet shares are not restricted to being used solely for controlling the level of dividends paid; they may be used to provide entitlement to rules separate from ordinary shares – for example, the limited voting rights at general meetings.

That said, their primary use is to provide a platform through which a dividend can be paid to a particular class of shares without being required to pay the same dividend to each shareholder. This is particularly beneficial when one shareholder is a higher rate or additional rate taxpayer, and the other pays a basic rate or none.

Alphabet shares are a legitimate method many companies use to differentiate between different types of shares, keeping shareholding and dividend distribution clear amongst shareholders. It is also a method contractors can use to ensure they make the best possible use of the tax allowances granted to them and their spouse.

As you can see, alphabet shares can be confusing, and we recommend speaking to a specialist accountant if you wish to pursue this.

Dividend waivers

Dividend waivers are where all shareholders have the same type of shares, but one shareholder waives their right to the dividend. HMRC are incredibly suspicious of dividend waivers and frequently challenges them if they think they’ve been made to avoid tax instead of genuine commercial benefit.

Although this is a potential option for contractors looking to make their spouse part of their limited company, it should be approached with caution. There need to be legal documents that are witnessed, and the waiver must be in place before the dividend is paid.

As with alphabet shares, we recommend speaking to a specialist before you make a decision.

Divorce

Although it’s unpleasant to discuss, one of the primary considerations around gifting shares to a spouse is what happens in the case of separation or divorce. To use the spousal exemption, any shares transferred to a spouse must be an outright gift. They belong entirely to your spouse and cannot be taken back. If you separate, your spouse will continue to own shares in your company and be entitled to any future dividend payments.

One way to protect against the above is with robust Articles of Association and Shareholders Agreement. Such documents can require shares previously transferred to a spouse to be ‘bought back’ by the business in case of a divorce.

Impact of inflation on company funds

For many business owners, surplus cash in a limited company often sits idle, providing a safety net for day-to-day operations. While the surplus funds in your business account might appear stable, their real-world value decreases each year, meaning you can buy less with the same amount of money:

The opportunity cost of leaving surplus funds in low-interest accounts is significant. Instead of growing wealth and outpacing inflation, idle cash stagnates, and the business misses valuable opportunities to generate returns through strategic investments. Furthermore, inflation disproportionately affects long-term planning. Goals such as building a retirement pot, acquiring property, or funding major projects become harder to achieve as the real value of cash reserves declines. Over time, this can undermine the company’s ability to adapt, grow, or secure its financial future.

Investing surplus company funds in assets that have the potential to generate higher returns is a powerful way to counter the effects of inflation and protect purchasing power.

A carefully crafted investment strategy not only preserves the value of your funds but also grows them in real terms. This enables your company to remain financially robust, achieve long-term goals, and take advantage of future opportunities without the constraints of inflation-induced losses.

Companies have access to a wide range of investment options, each with unique benefits and risks, depending on their goals, time horizons, and risk tolerance. Before we address the different options in detail, it is important to highlight the risk of being classified as a CIHC.

Close Investment Holding Companies (CIHC)

The approach you take to investing through your limited company matters as much, if not more, than what you invest in as certain risks can arise when blending trading and investment activities within a single company. The most critical of these risks is the possibility of your company being classified as a CIHC, leading to higher tax rates and the loss of certain tax reliefs.

A CIHC is a company whose principal activity is making investments rather than engaging in active trade, such as selling goods or providing services, and being classified as a CIHC by HMRC carries significant implications:

A CIHC is a company whose principal activity is making investments rather than engaging in active trade, such as selling goods or providing services

Being classified as a CIHC by HMRC carries significant implications:

HMRC determines whether a company qualifies as a CIHC by assessing its purpose of existence rather than just its activities. They define a CIHC in a negative, that is:

“A company is a close investment holding company if it does not exist wholly or mainly for the purpose of trading commercially or investing in land for (unconnected) letting or acting as a holding or service company within a group which exists wholly or mainly to trade or invest in land for letting.”

Most business (including those run by contractors) exist to trade on a commercial basis. The difficulty comes when businesses start to use their surplus funds for investment activities. Where is the distinction? HMRC uses the principle of “wholly or mainly” to determine the company’s purpose. While HMRC has used a 20% threshold in other contexts, such as defining “substantial” non-trading activities for Business Asset Disposal Relief or Business Property Relief, no explicit 20% test applies to the CIHC determination.

” To avoid being classified as a CIHC, businesses often separate trading and investment activities, either through group structures or distinct legal entities, ensuring compliance with HMRC’s trading status requirements.

Seeking professional advice from tax and legal experts is recommended for businesses navigating this complex area.

Two primary approaches are commonly used to separate trading and investment activities effectively: forming a holding company group or creating a separate investment entity funded by a loan from the trading company.

Stocks, ETFs, and Mutual Funds

Investing company funds in stocks, ETFs (exchange-traded funds), and mutual funds provides businesses with an excellent opportunity to grow surplus cash while maintaining access to diverse and liquid investment options. Corporate trading accounts allow companies to engage in the stock market, offering exposure to individual companies, broad market indices, or specific asset classes.

Property Investments

Whether through direct ownership of residential or commercial properties, financing development projects, or exploring alternative real estate investment strategies, companies can leverage property investments to diversify their portfolios and create consistent cash flow while building long-term wealth.

Private Investments

Private investments represent an opportunity for businesses willing to assume higher risk in exchange for potentially greater rewards. Unlike public securities, private investments provide direct access to innovative ventures, allowing companies to support entrepreneurial projects. Although private investments can yield substantial long-term returns, they also involve unique challenges such as illiquidity, a lack of transparency, and the need for thorough due diligence.

Savings Accounts and Bonds

With rising interest rates, high-yield savings accounts and bonds have emerged as practical options for businesses aiming to preserve capital while earning steady returns. These instruments could be well-suited for companies that prioritise safety and liquidity, offering predictable income with minimal risk.

These instruments are designed for capital preservation, making them attractive for risk-averse businesses. High-yield savings accounts provide immediate liquidity, while short-term bonds and money market funds balance safety with modest returns. The predictable income stream from these investments can support operational needs, act as a buffer against inflation, or provide a steady cash flow for reinvestment into higher-yield opportunities.

This guide is for informational purposes only and does not constitute investment, financial, legal, or tax advice. You should consult with a licensed financial advisor or tax professional for advice tailored to your specific circumstances.

A company can be considered dormant if it has had no significant accounting transactions during the period. A significant accounting transaction is one that the company should enter in its accounting records. They do not include filing fees, penalties for late filing, or money paid for shares when the company was incorporated.

Why make a company dormant?

There may come a time when you want to put your limited company in an ‘inactive’ state; this is known as making a company dormant. To be considered dormant, your company cannot trade or receive income from other sources (such as investments). As dormant companies are inactive, they are not liable for Corporation Tax.

Making your limited company dormant means you can restart it again with minimal effort. It is far simpler than closing the business and incorporating a new company when you’re ready to start again. It also ensures your business history continues uninterrupted.

You can use HMRC’s online service to tell them that your company is no longer trading and is dormant for Corporation Tax purposes. Before you start, you will need your 10-digit Unique Taxpayer Reference (UTR); and the date your company stopped trading (if it began trading). Here’s how to find your UTR number if you do not know it.

What are my responsibilities when my company is dormant?

Your responsibilities as a limited company director do not stop if you make your limited company dormant. Luckily, they are very straightforward.

How do I get money out of my dormant company?

Extracting money from your dormant company will trigger a clause in the Companies House rules and instantly make the company active again.

You can, of course, leave money in the limited company. You just won’t be able to access it until you decide to restart the business or close it down.

How to restart a dormant company

If you decide to start trading again, you must tell HMRC within three months of your dormant company becoming active. If your company has previously traded, you can sign into your existing HMRC online account and re-register the business as ‘active’ for Corporation Tax purposes. You will then submit tax returns and pay taxes as usual. Your next set of accounts will be trading as opposed to dormant.

Contractors and dormant Companies

Dormant limited companies have no ongoing administrative responsibilities beyond filing the annual accounts and the confirmation statement. These filings are due once a year and take no longer than 10 minutes each.

While trading accounts can be complicated and usually require the assistance of an accountant, dormant accounts are straightforward. Most of the financial data is prepopulated by HMRC’s systems using records of previous periods.

If nothing has changed within the business, which it is unlikely to have done, considering it is dormant, then confirmation statements are also very straightforward. They’re a tick-box exercise confirming the details that Companies House holds are correct.

Many contractor accountants offer to maintain a dormant company for reduced monthly fees ranging from £25 to £75. Contractors looking to save money could:

Closing a limited company involves either voluntary dissolution or members’ voluntary liquidation, depending on the value of remaining assets. Dissolution suits assets under £25,000, while liquidation is for larger values. Both processes require settling debts, transferring assets, and completing legal and tax obligations.

Voluntary Dissolution

Voluntary dissolution, also known as ‘striking off’, is an option if the capital gain released is less than £25,000, you have not traded or sold stock for three months, you have not changed the company name in the last three months, and you have not been threatened with insolvency by creditors.

Tax

If you take assets out of the company before they’re struck off, and the total value exceeds the tax-free allowance of £6,000, you must pay capital gains tax.

The amount of capital gains tax you pay is dependent on your income:

• If you’re a basic rate taxpayer, the rate is 10% on any gains that fall within the basic rate band and 20% on anything over.

• If you’re a higher rate or additional rate taxpayer, you’ll pay 20%.

The capital gains tax owed is calculated when you file your self-assessment tax return, and you may be eligible to receive Business Asset Disposal Relief (previously known as Entrepreneurs Relief).

If the amount exceeds £25,000, it will be treated as income, and you’ll have to pay Income Tax. In this scenario, a Member’s Voluntary Liquidation is preferable.

Member’s Voluntary Liquidation

You may choose members’ voluntary liquidation if your company is ‘solvent’ (can pay its debts) and you do not want to run the business anymore. Although it is often seen as more tedious, members’ voluntary liquidation is often the preferred method of closing a company as it is not subject to the same £25,000 ceiling as voluntary dissolution.

Tax

If the value of the assets you receive exceeds the tax-free allowance of £6,000, you will have to pay capital gains tax.

The amount of capital gains tax you pay is dependent on your income:

• If you’re a basic rate taxpayer, the rate is 10% on any gains that fall within the basic rate band and 20% on anything over.

• If you’re a higher rate or additional rate taxpayer, you’ll pay 20%.

The capital gains tax owed is calculated when you file your self-assessment tax return. You may be eligible to receive Business Asset Disposal Relief (previously known as Entrepreneurs Relief).

Unlike voluntary dissolution, there is no ceiling to the value of the assets you can receive via a Member’s Voluntary Liquidation.

Which is right for me?

Whether a voluntary dissolution or members voluntary liquidation is right for you is predominantly determined by the value of the remaining assets (including cash) your business has:

The liquidation process is usually relatively straightforward if you are a sole director/shareholder (as most Outside IR35 contractors are). Although hiring a liquidator sounds time-consuming, given your business’s nature, their task will be relatively simple and shouldn’t take too long.

Limited company directors have several options for withdrawing money from their business, each with distinct tax implications and administrative requirements. Understanding these methods ensures directors can withdraw funds effectively while remaining compliant with tax regulations.

Salary and dividends

Assuming you have no other sources of income, a tax-efficient way to take money from your limited company is via a combination of salary and dividend payments. This method works by paying yourself a specific salary and then paying out the rest of your post-tax profits via dividend payments.

Identifying the correct salary can be difficult; you must consider the National Insurance thresholds for employers and employees. If you take a salary higher than the employer and employee National Insurance thresholds, you will effectively pay National Insurance twice on the same income. You’ll pay once as an employer and once as an employee – not a tax-efficient way to operate.

For the year 2025/2026, the most tax-efficient way for a sole director/employee to withdraw money from their limited company is to take a gross annual income of £50,270.

Assuming no other sources of income, and the employment allowance is not claimed, this results in a take-home figure of £47,015 per year, or c.£3,918 per month.

National Insurance

At £12,570, your salary exceeds the Secondary Threshold for National Insurance. As a sole director, you can’t claim the employment allowance, which will incur Employer NI contributions of roughly £1,136 per year. As salaries and Employer’s NI Contributions are allowable expenses for Corporation Tax purposes (see below), reducing your Corporation Tax bill from paying yourself a higher salary offsets the Employer’s NI owed. You will save at least £1,654 in Corporation Tax (more if your effective tax rate is higher than 19%) against the Employer’s NI owed of £1,136.

£12,570 is above the Lower Earnings Limit but below the Primary Threshold. You will earn National Insurance credits (contributing to your state pension), but you won’t have to make any employee National Insurance Contributions.

Although £12,570 is the most tax-efficient salary for a sole director, it involves making National Insurance Contributions. Some limited company contractors prefer to avoid this extra burden, so they reduce the salary to £5,000, a level where no National Insurance is due.

At £5,000, your salary is at the Secondary Threshold and below the Primary Threshold, so there is no employer’s or employee’s National Insurance. It is higher than the Lower Earnings Limit, so you will continue to earn National Insurance credits.

Although £5,000 is more straightforward regarding administration, you are roughly £518 worse off than the salary of £12,570 due to less of an offset against your Corporation Tax bill.

The £518 (worse off) is calculated as (£12,570 + £1,136 – £5,000) * 19% – £1,136.

Employment Allowance

The employment allowance allows eligible employers to reduce their Employer’s National Insurance liability by up to £10,500. You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £10,500 has gone or the tax year ends (whichever is sooner)

You can only claim against your employers’ Class 1 National Insurance liability up to a maximum of £10,500 each tax year. You can still claim the allowance if your liability was less than £10,500 a year. There are multiple criteria for eligibility, though the relevant one here is that a company is not eligible for the employment allowance if there is only one employee in the company and that employee is also a director.

What this means in practice is that if you are a limited company contractor and you employ your spouse, you can both take salaries of £12,570 and use the employment allowance to reduce the Employer’s National Insurance liability to zero.

Director’s loan

A director’s loan occurs when a director borrows (or loans) money from (to) their limited company. HMRC defines a director’s loan as money taken from a company that is neither a salary, dividend, or expense repayment, or a repayment of money previously loaned to the company.

Director’s loans provide access to financing above and beyond salaries and dividends and may be utilised to help ease short-term personal financial issues. A record must be kept via the director’s loan account, shown as part of your company’s balance sheet.

If the company owes you money, your loan account will be in credit. In such instances, you can reclaim this money anytime without facing additional liabilities such as Income Tax. If you take more money from the business than you have loaned, your director’s loan account is said to be overdrawn.

Pension contributions

Contributing to your SIPP is an excellent way of saving for retirement and a tax-efficient way of using your business’s profits. The company’s contributions to your pension are allowable expenses, meaning you reduce your taxable profits and, therefore, your Corporation Tax liability.

Another benefit of making employer pension contributions via your limited company is that employer pension contributions are not subject to National Insurance.

Your annual allowance limits the pension contributions that can be made to all your pension schemes in a tax year (06 April to 05 April) before you have to pay tax on them. The current annual allowance is £60,000.

Trivial benefits and annual staff party

Contractors often overlook trivial benefits and the annual Christmas/staff party when considering how to withdraw money from their limited company.

Business Asset Disposal Relief

Business Asset Disposal Relief (‘BADR’), formerly Entrepreneur’s Relief, is a capital gains tax relief available to eligible individuals disposing of their businesses. Most contractors working through their limited company qualify for BADR as they are the business’s sole director/employee. If you qualify for BADR, you’ll pay tax at 10% instead of the standard rate of 20%. Given the complexities involved, we have written a separate Business Asset Disposal Relief guide.

Frequently asked questions

Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief, allows eligible individuals to pay a reduced 14% capital gains tax when disposing of qualifying business assets. Key criteria include owning at least 5% of shares, voting rights, and serving as a director for at least two years before disposal.

What is Business Asset Disposal Relief?

BADR is a capital gains tax relief available to eligible individuals when they dispose of (close, sell etc) their business. It reduces the capital gains tax rate on disposals of certain business assets from 20% to 14%.

You can claim BADR through your self-assessment tax return or by filling in Section A of the Business Asset Disposal Relief helpsheet. It must be claimed by the second 31 January following the end of the tax year in which the qualifying gain arose.

There’s no limit to how many times you can claim BADR, although there is a lifetime limit of £1m.

‘Substantial non-trading activities’

As mentioned above, BADR is only available for trading companies. It is not available for companies that have substantial non-trading activities. Most businesses will have some non-trading activity, so it is essential to determine precisely what ‘substantial’ means in this context.

HMRC has long advised that ‘substantial’ for BADR means 20%, and must consider income from non-trading activities, the asset base of the company and expenses incurred and time spent by officers and employees of the company in trading and non-trading activities.

However, in Assem Allam vs HMRC, the Upper Tribunal found that HMRC’s 20% guidance did not always produce the correct answer when deciding if BADR should be available. That concluded that the legislation does not provide for a strict numeric test. The test of whether non-trading activities are substantial is a holistic one that is not confined to physical human activity but requires an overall consideration of what the company does.

HMRC has now revised its manual, placing less emphasis on a 20% test, which it suggests is only likely to be relevant when considering turnover and the company’s asset base. If neither exceeds 20%, HMRC will generally accept that the relief is available without further enquiry.

In practice, this means that if your limited company holds investment property or invests its business profits directly in the stock market, you could be precluded from claiming BADR.

How does BADR impact contractors?

Most contractors working through their limited company qualify for BADR as they are the business’s sole director/employee. Even if your shareholdings are split (such as with your spouse), you likely have more than 5% of shares and voting rights.

This means that when a contractor decides to close their business, they will likely be eligible to pay 14% tax on the disposal of their business assets, including ‘retained earnings’. Retained earnings are the profit left within the business at the end of a financial year.

In other words, if a contractor leaves money in their limited company (instead of paying it all out as a dividend), it could be subject to a reduced capital gains tax rather than the Dividend Tax rate. Considering that the higher and additional tax rates for dividends are 33.75% and 39.35%, respectively, you can see how this results in significant savings.

The Targeted Anti-Avoidance Rules

When you consider that BADR is only available upon the disposal of a business, and it only costs £12 to open another, you can see how there is an incentive to close your company to claim the relief and then immediately start another to carry on trading.

This is known as ‘phoenixing’

Owners of a limited company put the business into liquidation, seeking to extract the value of the business as capital, paying the lower capital gains rates of tax rather than as income. They then create a new company doing something of a similar nature and repeat the cycle.

HMRC introduced the Targeted Anti-Avoidance Rules (TAAR) in 2016 to combat phoenixing. The rules are designed to prevent individuals from converting what would otherwise be a dividend into a capital repayment, thereby reducing their overall tax liability.

If you decide to close your business and claim BADR, you can’t be involved with the same trade or trade similar to that of the wound-up company at any time within two years from the date of the distribution. If you do, HMRC will treat the disposal as an income distribution instead of a capital gain, meaning you will be subject to higher Income Tax rates rather than the lower capital gains tax rate paid already.

To be caught by the TAAR rules, all of the following conditions need to be met:

If all of the above apply, the higher dividend rate of tax will be applied to the value of the assets received from the company closure. Depending on the value of the assets, the additional tax burden can be substantial.

Problems with the TAAR Rules

While conditions A and B are clear-cut, conditions C and D are less so. There are no legislative definitions of ‘to be involved with’ or ‘same trade or similar trade’, and determining whether the primary purpose of the winding up was to avoid tax is incredibly subjective. HMRC provides some guidance on the definitions; however, it is limited and only covers extreme examples. See here and here.

For example, upon retirement, it is not unusual for a previous business owner to continue in some capacity to provide services of a similar nature, perhaps to supplement pension income. HMRC provides the example of a landscape gardener who winds up their landscape gardening company and becomes a general gardener. This would be ‘of a similar nature’ and would be caught by condition C.

While condition C is ambiguous, condition D is far trickier to evaluate accurately. It is a highly subjective motive test, and HMRC considers it to be narrowly framed. It relates to your intentions when closing your company, not two years later, when/if you decide to open a similar business.

A significant amount of judgment needs to be applied to every case individually. Providing an exhaustive list is impossible, as individual facts and circumstances will be paramount. The aim is to establish whether it is reasonable to assume that the company was wound up as a way of converting into a capital transaction that would otherwise have been paid out as income.

Once you decide that condition D doesn’t apply, the onus is on HMRC to prove otherwise, and they can only displace your decision if it is ‘not reasonable’. If you have a genuine reason to close your business other than tax avoidance, HMRC will struggle to argue that condition D applies.

Continuing the example above, the primary purpose of the landscape gardener closing their business was to retire rather than avoid tax. Although the individual may be caught by condition C, they are not caught by condition D. Therefore, not all conditions have been met, and the TAAR rules do not apply.

TAAR and contractors

For those contractors that have closed their limited company and claimed Business Asset Disposal Relief, if the decision was driven purely by a desire to minimise tax, you cannot work in a similar industry for two years. If you do, you must pay additional tax on the disposal proceeds.

If your decision wasn’t motivated by a desire to reduce tax, and you can describe your actual motive fairly, then it’s unlikely the TAAR rules will catch you.

What about contractors that move from Outside IR35 to Inside IR35, closing their limited company to start working through an umbrella? Or what about contractors who want to move into a permanent role? In 2018, HMRC made several updates to its guidance on the TAAR legislation, most of which relate to condition D.

This means that contractors who close their limited company and start working as employees (either directly or via an umbrella company) are unlikely to be caught by TAAR.

While condition C may be met, condition D won’t be. It is unlikely the primary purpose of closing your business is tax avoidance if you’re moving from being a business owner to an employee, as employees pay more tax.

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