Limited company tax for contractors

Alphabet shares hold where a spouse or civil partner owns an ordinary share carrying full capital, voting and income rights, given outright with nothing coming back to you. They fail where the share is a dividend-only strip, where the shareholder is your minor child, or where waivers manufacture a split the company reserves cannot support.

If your company has lent you money that is still outstanding nine months and one day after the year end, it pays a section 455 charge of 35.75% on loans made from 6 April 2026. The money comes back under section 458 once you repay, but the refund is deferred by another full year.

Two routes exist for bringing a spouse into your contractor company, and they are taxed differently. A salary for real work is deductible, worth around £6,000 of household tax on £12,570 of profit, and can unlock the £10,500 Employment Allowance. Shares instead move dividends onto a second set of bands. Most contractor households end up using both.

The winding-up TAAR taxes a capital distribution from your contractor company as an income dividend where four conditions are met. Condition C is the one that catches contractors: carrying on the same or a similar trade within two years of the distribution. That two year clock, not the liquidation route, decides whether capital treatment survives.

Two legal routes exist for closing a solvent contractor company: voluntary strike-off (low-cost, capped at £25,000) and a Members' Voluntary Liquidation (MVL, suited to larger reserves and capital treatment). The right choice turns on reserve size, future contracting plans, and the TAAR's two-year same-trade trap, which can flip what looks like a capital gain into an income distribution.

Your headline day rate and your annual take-home are separated by tax, National Insurance, operating costs and, above all, the number of days you actually bill. This guide walks through billable-days realism and the three main contracting routes (outside-IR35 PSC, inside-IR35 and umbrella) so you can build an honest picture of what a day rate is worth.

Real contractor tax planning is a short list of legitimate levers used in the right order: how you take money out, the pension contribution that beats them all, the expenses you actually qualify for, the timing of declarations, and a clean exit. This guide sets out each lever at 2026/27 rates and draws a hard line under the avoidance schemes that look tempting and end badly.

Every contractor limited company pays corporation tax before a penny can be extracted as a dividend. Understanding the three-band structure, the 26.5% marginal trap and the two legitimate reducers (salary and pension) keeps more of your day rate in the right hands.

A contractor running a personal service company extracts profit through a mix of salary and dividends, and the right balance changed for 2026/27 when dividend rates rose. This guide sets out the salary options, the Employment Allowance fork that decides them, and the dividend planning that follows, without pretending one number fits every company.

Running your contracting business through a limited company gives you real tax flexibility, but the rules changed significantly from April 2026. This guide covers every layer of the tax picture for a PSC director: corporation tax bands and marginal relief, the 2026/27 dividend rates (raised by Finance Act 2026), NIC for a director's payroll, how to structure your salary and dividends correctly, and what happens when a director's loan goes overdrawn.