A limited company is a separate legal entity and has its own tax obligations distinct from those of its directors and shareholders. The main taxes a limited company may be liable for are:

• Corporation Tax. Charged on the company’s taxable profits, the profit remaining after allowable deductions. The main rate is currently 25% for profits above £250,000. A small profits rate of 19% applies to profits below £50,000. Profits between £50,000 and £250,000 attract a tapered rate. These thresholds are divided by the number of associated companies.
• Charged on the supply of most goods and services where the company’s taxable turnover exceeds the VAT registration threshold (currently £90,000). VAT is collected from customers and paid to HMRC, net of any VAT reclaimed on purchases.
• Employer’s National Insurance Contributions (NICs). Charged on employee wages above the Secondary Threshold (currently £9,100 per year). The standard employer NIC rate is 13.8%. An additional levy applies to companies above a certain payroll size.
• Income Tax and employee NICs deducted from salaries and paid to HMRC under the Pay As You Earn system.
• Business rates. Charged on commercial property occupied by the company, where applicable.
• Stamp Duty Land Tax. On the purchase of property or land by the company.
• Dividend Tax. Not paid by the company, dividends are paid from after-tax profits, but payable by shareholders on dividends received above the annual dividend allowance.

Understanding which taxes apply to your business and when they fall due is the starting point for effective tax management. A single missed deadline across any of these can trigger penalties.

As an individual, a director is subject to personal taxes on income received from the company and from any other sources. The main personal taxes are:

• Income Tax. Charged on salary, benefits in kind, rental income and other non-dividend income. The rates are 20% (basic rate), 40% (higher rate, above £50,270) and 45% (additional rate, above £125,140). The personal allowance of £12,570 is withdrawn at a rate of £1 for every £2 of income above £100,000.
• National Insurance Contributions (employee). Charged on salary above the Primary Threshold. Class 1 employee NICs are currently charged at 8% on earnings between the primary threshold and the upper earnings limit, and 2% above that.
• Dividend Tax. Charged on dividends received above the annual dividend allowance (currently £500). Rates are 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate).
• Capital Gains Tax. Charged on the disposal of assets, including shares in a company, above the annual exempt amount. Business Asset Disposal Relief can reduce the rate to 10% on qualifying gains up to a lifetime limit of £1 million.
• Self Assessment. Most directors must file an annual Self Assessment tax return to report all income and calculate their personal tax liability.

The interaction between these taxes, particularly salary, dividends and the loss of the personal allowance above £100,000, is where careful annual planning produces the greatest savings.

For most owner-managed companies, the standard approach is a combination of salary and dividends, structured to minimise the combined Corporation Tax, Income Tax and National Insurance burden.

The typical structure works as follows:

• Pay a salary at or just above the National Insurance Lower Earnings Limit (currently £6,396 per year) to preserve state pension entitlement without triggering employee or employer NIC liabilities. Some directors prefer a salary up to the Personal Allowance (£12,570) where the company has no other employees and the Employment Allowance does not apply.
• Take the remainder of required income as dividends, up to the basic rate dividend tax band where possible. Dividends in the basic rate band are taxed at 8.75%, significantly less than the combined effect of Income Tax and NICs on salary.
• Maximise pension contributions. Company pension contributions reduce Corporation Tax, are not subject to NICs, and do not count as personal income for tax purposes.

The optimal structure is not static. It changes as tax rates, thresholds, the personal allowance, dividend allowance and Corporation Tax rates change. It also depends on the director’s other income, the company’s profitability and whether there are other shareholders.

This structure should be reviewed with your accountant at the start of every tax year, not at the end. By the time the year end arrives, the opportunity to plan has largely passed.

Tax becomes a problem when it is either higher than it needs to be, because planning has not been done, or when it creates a cash flow difficulty because it has not been set aside throughout the year.

The most common tax burden problems for directors:

• Income above £100,000. The personal allowance tapers away at a rate of £1 for every £2 above £100,000, creating an effective marginal rate of 60% on income between £100,000 and £125,140. This is one of the most avoidable tax traps and one of the least well understood.
• High retained profits with no extraction plan. Leaving large profits in the company is not automatically tax-efficient. The money will eventually need to come out, and the tax consequences of extraction depend on how it is done.
• Corporation Tax at the marginal rate. For companies with profits between £50,000 and £250,000, the effective marginal rate of Corporation Tax is 26.5% due to the taper. Understanding this helps with planning.
• Missing VAT registration. Trading above the VAT threshold without registering can result in HMRC treating the income received as VAT-inclusive, creating a retrospective liability.

Tax becomes genuinely problematic when it arrives as a surprise, because no estimate was prepared, no provision was set aside, and the payment falls due at a time when the cash is not available. Regular management accounts with a running tax estimate prevent this.

This is an important distinction and one that is frequently misunderstood.

Tax evasion is illegal. It involves deliberately concealing income, making false statements or otherwise deceiving HMRC. Examples include failing to declare income, falsifying records or claiming deductions for expenses that were never incurred. Tax evasion is a criminal offence carrying potentially unlimited fines and imprisonment.

Tax avoidance is the use of legal means to reduce a tax liability. It is not illegal. Examples include taking income as dividends rather than salary, making pension contributions, using available reliefs and allowances, and structuring business affairs in a tax-efficient way. These are legitimate and routinely recommended by accountants and financial advisers.

However, there is a middle ground that HMRC increasingly challenges, artificial tax avoidance schemes that are technically within the letter of the law but are designed to produce outcomes that Parliament did not intend. HMRC has significant powers to challenge such arrangements under the General Anti-Abuse Rule (GAAR) and specific anti-avoidance legislation.

The practical guidance is this: legitimate tax planning within the framework of the law is sensible and responsible. Arrangements that seem too good to be true, those that promise to eliminate tax entirely with no genuine commercial substance, should be treated with significant caution.

The honest answer is that without a comparison against what you should be paying, you cannot know.

Signs that you may be paying more tax than necessary:

• You have not reviewed your salary and dividend mix since your company was formed.
• You have never made a company pension contribution.
• You have not claimed all allowable business expenses, including use of home, mileage, professional subscriptions and training.
• You have never discussed capital allowances or Research and Development relief with your accountant.
• Your accountant prepares your accounts and tax return but has never proactively suggested any changes.
• Your income is above £100,000 and no planning has been done around the personal allowance taper.

The best way to find out is to ask your accountant to prepare a tax review, a comparison of your current structure against available alternatives. This is a routine piece of work for any accountant and should not require significant additional cost. If it is not something your accountant does as a matter of course, it is worth asking why.