If you run your business through a limited company, you pay two separate taxes on your profits. Corporation tax is charged on the company's profits. Dividend tax is charged on the money you take out of those profits as a shareholder. Understanding how corporation tax and dividend tax work together is the single most important piece of tax planning you will do as a director.
Get the balance right and you can save thousands each year compared to operating as a sole trader. Get it wrong and you could overpay tax, trigger unnecessary National Insurance, or create problems with your director's loan account.
This guide explains the 2025/26 rates, how the two taxes interact, and the practical steps to structure your pay efficiently. As ICAEW qualified accountants working with limited company directors across the UK, from freelance consultants in Bristol to husband-and-wife cafe owners in Birmingham, these are the numbers we run every day.
The Two Taxes Explained Simply
Your limited company earns income and pays corporation tax on its profits. The money left after tax is retained profit. You can leave that profit in the company for future investment, or you can distribute it to yourself and any other shareholders as dividends.
Dividends are not a deductible expense for the company. You pay them from post-tax profits. When you receive a dividend personally, you pay dividend tax on the amount above your annual allowance, at rates that depend on your total income for the year.
This two-stage system is why corporation tax and dividend tax are often discussed together. The company pays first. You pay second. The total combined tax rate on each pound of profit is lower than the equivalent income tax and National Insurance a sole trader pays, up to a certain profit level.
Corporation Tax Rates for 2025/26
Corporation tax rates for the 2025/26 tax year (accounting periods starting on or after 1 April 2025) are:
- Small profits rate: 19% on profits up to £50,000
- Main rate: 25% on profits above £250,000
- Marginal relief: applies between £50,000 and £250,000, giving an effective rate that rises gradually from 19% to 25%
If your company's profits are £63,400, you do not pay a flat 25% on the whole amount. Marginal relief calculates a blended rate. The effective corporation tax rate on £63,400 of profit is approximately 20.5%. At £92,800, it is roughly 22.3%. At £150,000, it is around 23.5%.
These thresholds are divided by the number of associated companies. If you control two limited companies, each one's thresholds are halved. A company with one associated company gets a small profits rate on profits up to £25,000 and marginal relief up to £125,000.
Dividend Tax Rates for 2025/26
When you take dividends from your company, you pay dividend tax on the amount above your annual allowance. The rates for 2025/26 are:
- Dividend allowance: £500 per person per year (down from £1,000 in 2024/25 and £2,000 in 2023/24)
- Basic rate taxpayers: 8.75% on dividends above the allowance
- Higher rate taxpayers: 33.75% on dividends above the allowance
- Additional rate taxpayers: 39.35% on dividends above the allowance
Your dividend tax rate is determined by your total taxable income for the year, including salary, dividends, bank interest, rental income, and any other sources. Dividends are treated as the top slice of your income, so they sit on top of your salary and other earnings.
The £500 allowance means you can take £500 in dividends tax-free each year. Any dividends you receive above that are taxed at your marginal dividend rate.
How Corporation Tax and Dividend Tax Interact in Practice
Here is the sequence of events for a typical limited company director extracting profit:
- The company earns £100,000 of profit before tax.
- The company pays corporation tax of roughly £22,300 (assuming marginal relief applies).
- The remaining £77,700 is retained profit available for distribution.
- The director takes a salary of £12,570 (the personal allowance amount).
- The director takes dividends from retained profit, up to the basic rate band limit.
- Dividend tax is payable personally on dividends above the £500 allowance.
The key point is that corporation tax is paid first, reducing the pool available for dividends. You cannot avoid corporation tax by not taking dividends. The company owes corporation tax on its profits regardless of whether you extract them.
This is where planning matters. If you take too much salary, you trigger employer and employee National Insurance. If you take too many dividends, you push yourself into higher rate tax and pay 33.75% on the excess. The sweet spot is a modest salary plus dividends up to the basic rate band.
The Most Tax Efficient Pay Structure for 2025/26
For most limited company directors, the most efficient approach is:
- Salary: £12,570 per year (the personal allowance and primary NI threshold). This uses your personal allowance, earns National Insurance credits for state pension, and avoids income tax and employee NI.
- Dividends: Up to £37,700 (the basic rate band) minus the £500 dividend allowance, so approximately £37,200 in dividends. These are taxed at 8.75%.
Under this structure, a director with no other income pays total personal tax of approximately £3,256 on dividends of £37,700. The company pays corporation tax on the profits needed to fund those dividends.
If the company's profit is £63,400 and you take the full £12,570 salary plus £37,700 dividends, the total combined tax (corporation tax plus personal tax) is roughly £16,200. That is an effective rate of around 25.5% on the total profit.
Compare that to a sole trader earning £63,400. They pay income tax of approximately £10,166 and Class 4 NIC of around £3,970, totalling £14,136. That is an effective rate of 22.3%. The sole trader pays less total tax at this profit level because corporation tax and dividend tax combined are slightly higher than income tax and NIC.
But the limited company structure gives you flexibility. You can leave profit in the company and defer the dividend tax. You can reinvest in equipment and claim capital allowances. You can spread dividends across multiple shareholders. And at higher profit levels, the company structure becomes more tax efficient.
When the Limited Company Structure Wins on Tax
At higher profit levels, the combined corporation tax and dividend tax rate becomes lower than the equivalent income tax and NIC for a sole trader. Here is the comparison at £150,000 of profit:
Sole trader at £150,000: Income tax of approximately £49,532 plus Class 4 NIC of around £5,044, total £54,576. Effective rate 36.4%.
Limited company director at £150,000: Corporation tax of roughly £35,250 (23.5% effective rate) plus personal dividend tax of around £22,000 (on dividends above the basic rate band), total £57,250. Effective rate 38.2%.
The company structure is still slightly higher at this level, but the gap narrows. And once profits exceed approximately £180,000, the company structure starts to pull ahead. The crossover point depends on your exact dividend strategy and whether you have other income.
The real advantage of the limited company is not always the headline rate. It is the ability to control timing. You can leave profits in the company and extract them in a lower income year. You can pay dividends to a spouse who has unused basic rate band. You can reinvest profits and defer tax indefinitely.
Dividend Tax Planning for Married Couples
If you run your company with a spouse or civil partner, you can issue alphabet shares to allow flexible dividend allocation. This is one of the most effective planning strategies available.
Here is how it works. You and your spouse each hold a different class of shares, typically A shares and B shares. Both classes have the same economic rights, but the company can declare a dividend on one class without declaring it on the other. This lets you allocate dividends to the shareholder with the lowest tax rate.
For example, if you are a higher rate taxpayer and your spouse has no other income, you can declare a dividend of £37,700 on the B shares (held by your spouse) and a smaller dividend on your A shares. Your spouse pays 8.75% on dividends above the £500 allowance. You pay 33.75% on yours. The total tax bill is significantly lower than if you took all the dividends yourself.
There are limits. The settlement legislation (often called "settlements" or "anti-avoidance") can apply if shares are gifted to a spouse who does not genuinely participate in the business. HMRC can reallocate the dividend income back to you if the arrangement is purely tax driven with no economic substance. This is less of a risk for genuine joint businesses where both spouses are involved, but it is worth understanding before you issue shares.
We cover this in more detail in our guide to director pay and dividends.
Director's Loan Account and Dividend Tax
One area where corporation tax and dividend tax interact directly is the director's loan account. If you take money from the company that is not salary, dividend, or repayment of expenses, it goes into a director's loan account.
If the loan exceeds £10,000 at any point in the year, the company must report it as a benefit in kind on a P11D. You pay tax on the beneficial loan interest (the difference between the official rate and any interest you pay).
More importantly, if the loan is not repaid within 9 months and 1 day of the company's year-end, the company pays S455 tax at 33.75% on the outstanding amount. This is a charge that sits on top of corporation tax. The company can reclaim the S455 tax when you repay the loan, but it is a cash flow cost in the meantime.
The clean way to extract money from your company is to declare a dividend. This requires sufficient retained profits, a board meeting, and dividend vouchers. It avoids the director's loan account complications entirely.
If you have an overdrawn director's loan account at your year-end, speak to your accountant before the 9-month deadline. A properly documented dividend can clear the balance and avoid the S455 charge.
Corporation Tax Payment Deadlines
Your company must pay corporation tax 9 months and 1 day after the end of its accounting period. For a company with a 31 March year-end, the payment deadline is 1 January.
If your company's taxable profits exceed £1.5 million, you must pay corporation tax in quarterly instalments. Most small and growing companies do not reach this threshold, so a single annual payment is the norm.
Dividend tax is paid through your self assessment. You report dividends on your SA100 tax return and pay the tax by 31 January following the end of the tax year. If your dividend tax bill is over £1,000 and more than 80% of your total tax liability, you may need to make payments on account.
This timing difference matters. Corporation tax is paid 9 months after the company's year-end. Dividend tax is paid up to 22 months after the dividend is received (if you receive a dividend in April 2025, you report it on your 2025/26 return due January 2027). The company pays tax first. You pay later.
Common Mistakes with Corporation Tax and Dividend Tax
Here are the mistakes we see most often from new directors:
Taking dividends without sufficient retained profits. Dividends can only be paid from distributable profits. If your company has made a loss or has insufficient retained earnings, a dividend is illegal under the Companies Act 2006. Directors can be personally liable to repay it.
Ignoring the dividend allowance reduction. The allowance dropped from £2,000 to £1,000 in 2024/25 and then to £500 in 2025/26. If you are used to taking £2,000 of dividends tax-free, you now owe tax on £1,500 of that amount. Update your dividend planning accordingly.
Mixing salary and dividends without proper payroll. Salary must be processed through a RTI-compliant payroll. You cannot simply transfer money from the company to yourself and call it salary. Use software like Xero, FreeAgent, or BrightPay to run payroll correctly.
Not considering associated companies. If you control multiple companies, each one's corporation tax thresholds are divided. This can push a small company into the marginal relief band unexpectedly.
Forgetting the Employment Allowance. If your company's total employer NI is under £100,000 per year, you can claim the Employment Allowance of up to £10,500. This can make a £12,570 salary more efficient than taking a lower salary to avoid employer NI.
How to Calculate Your Total Tax Bill
If you want to estimate your combined corporation tax and dividend tax for the 2025/26 year, follow these steps:
- Estimate your company's taxable profit for the year.
- Calculate corporation tax using the marginal relief tables (or use our online calculators).
- Subtract corporation tax from profit to get retained profit.
- Decide how much salary to take (typically £12,570).
- Decide how much dividend to take from retained profit.
- Calculate your total personal income (salary plus dividends plus any other income).
- Apply the personal allowance and basic rate band to determine your dividend tax rate.
- Calculate dividend tax on dividends above the £500 allowance.
Your total tax bill is corporation tax plus dividend tax plus any employer NI on salary (net of Employment Allowance).
If this sounds complicated, it is because the system has multiple moving parts. That is why most directors use an accountant to run the numbers each year. The savings from getting the structure right typically far exceed the accountancy fee.
When to Review Your Structure
You should review your corporation tax and dividend tax planning at least once per year, ideally before your company's year-end. Key trigger points for a review include:
- Your profits have grown significantly year-on-year
- You have taken on a new shareholder or director
- Your spouse has started or stopped working
- You have other income that pushes you into higher rate tax
- The dividend allowance or tax rates have changed (as they have for 2025/26)
- You are considering selling the company or retiring
If any of these apply to you, book a call with your accountant before the year-end. Adjusting your dividend strategy after the year-end is possible, but it is cleaner to plan in advance.
For a full breakdown of the rules, including worked examples for different profit levels, see our corporation tax guide and our director pay and dividends guide.
If you are thinking about incorporating, read our incorporation guide first. The decision to move from sole trader to limited company depends on your profit level, your plans for reinvestment, and whether you want the flexibility of the dividend model.