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 for 2025-26 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. He pays himself a salary of £12,570. After Corporation Tax of 19% on the remaining £62,430, the company has £50,568 to distribute as dividends. Mike pays dividend tax of approximately £3,900 on this. His total tax bill (salary NI + Corporation Tax + dividend tax) is around £15,700. As an employee earning £80,000, he would pay approximately £22,500 in 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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