Limited Company Explained
A separate legal entity you can use to run a business or contract. Profits are subject to Corporation Tax, and you extract income through a combination of salary and dividends.
What is Limited Company?
A limited company (Ltd) is a business structure registered with Companies House. It has its own legal identity, separate from the directors and shareholders. The company pays Corporation Tax on its profits, and the directors can take money out through salary, dividends, pension contributions or expenses. For contractors, running a limited company (sometimes called a Personal Service Company or PSC) can be more tax-efficient than working through an umbrella company, provided the engagement is outside IR35.
How it works
Corporation Tax rates are 19% on profits up to £50,000 (small profits rate), rising to 25% on profits above £250,000. Between £50,000 and £250,000, marginal relief applies. Most contractor limited companies make under £50,000 profit and pay the 19% rate. Directors typically pay themselves a salary of £12,570 (the Personal Allowance) and take the rest as dividends, which are taxed at lower rates than salary.
Real example
Mike runs a limited company with £80,000 annual revenue and £5,000 in expenses. In 2026-27 he pays himself a salary of £12,570, which costs the company £1,135.50 in employer NI (15% above £5,000). The remaining profit of £61,294.50 falls in the marginal relief band, so Corporation Tax is about £12,493 (25% less marginal relief), leaving about £48,801 to distribute as dividends. At the 2026-27 dividend rates (10.75% and 35.75% after the £500 allowance), Mike pays about £7,968 in dividend tax. His total tax bill (employer NI + Corporation Tax + dividend tax) is about £21,600. As an employee in England earning £80,000, he would pay about £23,040 in Income Tax and NI.
Who does this affect?
Contractors working outside IR35, freelancers and small business owners. Running a limited company involves more admin (annual accounts, Corporation Tax returns, confirmation statements) and typically costs £1,000-2,000 per year in accountant fees. The tax savings usually outweigh these costs if you earn more than £30,000 per year through the company.
HMRC source
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