Two routes, one outcome, very different tax bills
When a contractor's limited company has run its course, there are two lawful routes for closing it as a solvent entity: a voluntary strike-off through Companies House, or a Members' Voluntary Liquidation (MVL) conducted by a licensed insolvency practitioner. Both result in the company being dissolved. The route you choose determines how the retained reserves are taxed in your hands, and in many cases that difference is tens of thousands of pounds.
The decision is not complicated in principle, but it is easy to get wrong in practice. The threshold between strike-off and MVL, the Business Asset Disposal Relief (BADR) conditions, and the TAAR's hard stop on continuing contractors all need to be understood before starting the process. Getting the sequencing wrong, particularly around director loans and the two-year TAAR window, can turn a planned capital receipt into a fully taxed dividend.
This guide covers the mechanics of both routes, the tax treatment of each, BADR with its current and prior rate bands, and the TAAR four conditions that every contractor planning to keep working must understand. For the broader picture of running your PSC's finances, see our guide to limited company tax for contractor PSCs.
Voluntary strike-off: the basics
A voluntary strike-off (sometimes called administrative dissolution) is the simpler and cheaper route. The directors apply to Companies House on form DS01. If no objections are received within two months, the registrar strikes the company from the register and it ceases to exist.
Strike-off is only available where the company has settled all its debts and obligations. HMRC must be notified and outstanding tax liabilities must be cleared. The company must not have changed its name in the preceding three months and must not be subject to any pending legal proceedings. Attempting a strike-off with live creditors is a criminal offence under the Companies Act 2006.
The £25,000 capital limit
The important tax point for strike-off is the £25,000 capital distribution limit. Where total distributions to shareholders in the winding-up do not exceed £25,000, HMRC treats the receipt as a capital distribution rather than income. The amount is reported on the director's self-assessment return as a capital gain. If Business Asset Disposal Relief applies, the 18% BADR rate (from 6 April 2026) may be available on the gain.
Where total distributions exceed £25,000, the entire receipt is treated as income (a dividend) and taxed accordingly, at ordinary dividend rates of 10.75%, 35.75% or 39.35% depending on the individual's other income in 2026/27. There is no partial capital treatment for the slice up to £25,000 once the threshold is crossed: it is all income or all capital depending on the total.
A contractor with meaningful reserves sitting in the company above that level needs to use an MVL to retain capital treatment.
Members' Voluntary Liquidation: how it works
An MVL is a formal insolvency procedure, but it is a solvent one. The company can pay all its debts in full, and the winding-up is a mechanism to distribute the remaining assets to shareholders as capital rather than as a dividend. The process requires a licensed insolvency practitioner to act as liquidator.
The typical steps are:
- The directors make a Declaration of Solvency under s.89 Insolvency Act 1986, confirming the company can pay its debts in full within 12 months (in practice almost always immediately for a single-director PSC).
- Shareholders pass a special resolution to wind up the company voluntarily and appoint the liquidator.
- The liquidator collects the company's assets, pays any outstanding creditors and costs, and distributes the balance to the shareholders as a capital distribution.
- The liquidator files the final account with Companies House and the company is dissolved.
The distribution the shareholders receive is a capital sum, not a dividend. That means it is subject to capital gains tax (and potentially BADR) rather than income tax at dividend rates. For a contractor who has built up a significant retained profit pot, this distinction is worth serious money.
Liquidator fees and when the MVL math works
Liquidators typically charge between £1,500 and £3,000 or more for a straightforward PSC MVL. The fee is deductible as a company expense before the final distribution, so the net cost is lower than the headline. The MVL is economically worthwhile when the tax saving on the distribution comfortably exceeds the professional fee.
As a rough illustration for 2026/27: a higher-rate contractor with £80,000 of reserves would pay roughly £28,600 in income tax if those reserves came out as a dividend (upper rate 35.75% on the excess above the £500 dividend allowance and the basic-rate band headroom). Via an MVL with BADR, assuming a £nil base cost, the same £80,000 would generate a capital gain of around £80,000, of which the first £3,000 is covered by the annual CGT exempt amount and the remainder taxed at 18% under BADR, giving approximately £13,860. The saving, after a £2,000 liquidator fee, exceeds £12,000 on this example.
The calculus changes if BADR does not apply (see below) or if the TAAR re-characterises the distribution as income.
Business Asset Disposal Relief in 2026/27
Business Asset Disposal Relief (BADR) reduces the CGT rate on qualifying gains to a lower rate, subject to a £1m lifetime limit per individual. The rate has changed in recent years and it matters which year the disposal falls in:
| Disposal date | BADR rate |
|---|---|
| To 5 April 2025 | 10% |
| 6 April 2025 to 5 April 2026 | 14% |
| 6 April 2026 onwards (2026/27) | 18% |
The statutory basis is TCGA 1992 ss.169H to 169S, with the rate steps confirmed at HMRC CG64174. The £1m lifetime limit per individual is unchanged. Any gains within the £1m that have already used the allowance in earlier disposals reduce what remains available.
BADR qualifying conditions for a company winding-up
For an MVL distribution to qualify for BADR, the following must have been satisfied throughout the two years immediately before the disposal:
- Personal company. You hold at least 5% of the ordinary share capital, at least 5% of the voting rights, and are entitled to at least 5% of the distributable profits and at least 5% of net assets on a winding-up. A company restructured shortly before closure to create multiple share classes that dilute any of these percentages below 5% may fail this test.
- Officer or employee. You were a director or employee of the company throughout the two-year period. Most single-director contractors satisfy this as a matter of course.
- Trading company. The company was a trading company (or the holding company of a trading group) throughout the period. A company that stopped trading months before closure and became dormant may fail this test; HMRC has challenged dormancy periods.
A company that was actively contracting and then closed in the normal course of business will usually satisfy all three. Where BADR conditions are not met, the standard CGT rate for 2026/27 is 18% within the basic-rate band and 24% above it (for most assets). For a higher or additional-rate contractor who does not qualify for BADR, the MVL capital route still beats the dividend route (35.75% or 39.35%) on the rate difference alone.
The TAAR: the two-year trap for continuing contractors
The Targeted Anti-Avoidance Rule in ITTOIA 2005 s.396B sits at the centre of any closure decision for a contractor who intends to keep working. Where all four conditions are met, HMRC re-characterises the winding-up distribution as an income dividend rather than a capital receipt, making BADR irrelevant and exposing the full amount to income tax at dividend rates.
The four conditions
Condition A. The individual held at least 5% of the ordinary shares and voting rights of the company immediately before the winding-up began.
Condition B. The company was a close company (broadly: controlled by five or fewer participators) at some point during the two years ending with the winding-up. For a single-director PSC this is almost always satisfied as a matter of fact.
Condition C. Within two years of the date of the distribution, the individual continues or becomes involved in the same or a similar trade or activity to that carried on by the company. This is the condition that catches the contractor who closes their PSC, takes the capital distributions, and then returns to contracting in the same field, whether through a new limited company, through an umbrella arrangement, or as a sole trader.
Condition D. It is reasonable to assume that one of the main purposes of the winding-up (or a relevant step connected with it) was to avoid or reduce an income tax liability. HMRC does not need to prove this was the only purpose, only that it was a main purpose. Where a contractor has substantial retained profits and chooses the MVL route shortly before resuming the same contracting trade, HMRC will scrutinise whether Condition D is met.
All four conditions must be met for the TAAR to bite. Conditions A and B are met for nearly every contractor PSC. The practical risk therefore concentrates on Conditions C and D together.
What "same or similar trade" means in practice
The TAAR does not require you to continue with the same end client. If you close a PSC that provided software development services and then within two years incorporate a new PSC (or join an umbrella) to provide software development services to different clients in the same sector, HMRC is likely to view the trade as the same or similar for the purposes of Condition C.
The two-year clock runs from the date of the winding-up distribution, not from the company's dissolution date. It is not reset by taking a break of several months between the MVL and resuming work. HMRC looks at the substance of what you do, not the legal wrapper or the gap in between.
Why an MVL is not a clean capital exit if you keep contracting
This point merits a direct statement. For a contractor who plans to keep contracting in the same or similar trade within two years of the distribution, an MVL is not a clean route to capital treatment. Condition C means the TAAR is potentially triggered. Even if the motivation is not primarily tax avoidance, HMRC will consider whether Condition D is met, and the combination of substantial reserves, an MVL, and prompt return to the same trade is a pattern HMRC knows well (CTM36305).
If you are winding up because you genuinely intend to retire, change career, or significantly change the nature of your activities for at least two years, the MVL is a legitimate and well-established route. If you intend to carry on contracting in the same field in the near future, take specialist advice before proceeding; the tax saving you are modelling may not be available.
Director loan accounts: clear them before you start
An overdrawn director's loan account (DLA) is a debt the director owes to the company. On a winding-up, the liquidator is under a duty to collect all assets, including money owed by directors. An uncleared DLA at the point the liquidation commences must be repaid to the liquidator and forms part of the distributable pool, or it must be formally written off as income in the director's hands.
The separate s.455 issue can also affect a closure. Under CTA 2010 s.455, where a director's loan is still outstanding 9 months and 1 day after the end of the accounting period in which it was made, the company must pay a corporation tax charge at the dividend upper rate on the outstanding amount. For loans made on or after 6 April 2026 that rate is 35.75%; for loans made before 6 April 2026 the rate was 33.75%. The s.455 charge is temporary: once the loan is repaid, released or written off, s.458 relief returns the s.455 tax to the company, but that relief is itself deferred to 9 months and 1 day after the end of the accounting period in which the repayment occurs. It is not immediate.
A loan over £10,000 that is outstanding at any point in the tax year is also a beneficial loan benefit in kind (ITEPA 2003 ss.173 to 191) unless the director pays interest at the HMRC official rate. This creates a personal income tax charge on the director and an employer NIC cost on the company, in addition to the s.455 CT charge.
The practical takeaway: start a closure process only when the director's loan account is nil, or with a concrete plan and timeline to clear it before the final accounting period ends.
Sequencing a clean closure
For a straightforward PSC with no director loan and no plans to continue the same trade within two years, the typical sequencing is:
- Final trading and accounts. Complete the last contract. File final VAT returns and deregister. Prepare up-to-date management accounts so you know the exact distributable reserve.
- PAYE and payroll closure. Submit the final full-payment submission, close the PAYE scheme and deal with any outstanding employer NIC (including Employment Allowance where eligible).
- Corporation tax final period. Submit the CT600 for the final accounting period and pay any outstanding corporation tax. HMRC issues a clearance letter before dissolution, which the liquidator will require.
- VAT deregistration. File a final VAT return on deregistration, accounting for any assets on hand at market value where applicable.
- Decision point. If the net distributable reserve is £25,000 or below, voluntary strike-off via DS01 is available. If above £25,000 and you want capital treatment, appoint a liquidator and proceed with the MVL.
- Director loan. Ensure the DLA is nil before closing the PAYE scheme and before the final accounting period end.
- MVL (if applicable). Shareholder special resolution, Declaration of Solvency, liquidator appointed, assets collected, final distribution made, final accounts filed with Companies House.
The process typically takes two to four months for an MVL from appointment to dissolution. Strike-off can complete in as little as three months if there are no objections.
Strike-off vs MVL: a summary comparison
| Factor | Voluntary strike-off | MVL |
|---|---|---|
| Reserve threshold | Up to £25,000 | Any amount |
| Distribution treatment | Capital (subject to £25,000 limit) | Capital |
| BADR available? | Yes, if qualifying conditions met | Yes, if qualifying conditions met |
| Insolvency practitioner required? | No | Yes (licensed liquidator) |
| Typical cost | Companies House fee only | £1,500 to £3,000+ |
| Timeline | Roughly 3 months | Roughly 2 to 4 months |
| TAAR applies? | Yes, if same trade within 2 years | Yes, if same trade within 2 years |
| DLA must be cleared first? | Yes | Yes |
Capital treatment vs dividend: understanding the rate difference
The financial case for capital treatment rests on the gap between CGT rates and income tax on dividends. For 2026/27:
- Dividend rates: 10.75% (ordinary), 35.75% (upper), 39.35% (additional), after a £500 dividend allowance. These rates apply to the band into which the dividend falls once non-savings income is accounted for.
- BADR CGT rate: 18% from 6 April 2026 on qualifying gains within the £1m lifetime limit.
- Standard CGT rates (where BADR does not apply): 18% basic rate band, 24% above (for most assets in 2026/27).
A higher-rate contractor taking a £100,000 distribution as a dividend would pay roughly £35,750 in income tax (upper dividend rate on the amount above the allowance and any basic-rate headroom). The same amount via MVL with BADR costs roughly £18,000 in CGT at 18%. Even without BADR, the capital route at 24% standard CGT costs roughly £24,000, still significantly below the dividend route. The higher the reserve and the higher the individual's marginal tax rate, the stronger the MVL case, subject always to the TAAR check and the liquidator fee.
The dividend rates rose on 6 April 2026 under Finance Act 2026 s.4 (ordinary 8.75% to 10.75%, upper 33.75% to 35.75%), which has widened the gap between income and capital treatment slightly compared with 2025/26.
For how dividend tax interacts with salary planning throughout your contracting career, rather than just at closure, see our guide on corporation tax for a contractor limited company and the optimal director salary and dividend split.
What if you are inside IR35?
An inside-IR35 engagement does not itself affect how you close the company, but it affects what reserves you have to close with. Inside-IR35 income arrives in the PSC after PAYE and employer NIC have already been deducted by the fee-payer (under Chapter 10 for medium and large clients). The PSC therefore holds less retained profit than it would on equivalent outside-IR35 earnings. The closing mechanics are the same regardless; the MVL is still the right route for reserves above £25,000. For the IR35 status picture and how it affects the company during its life, see our guide to what IR35 is and how it works.
Taking advice before you close
Closing a limited company is a one-way process. The decisions around timing, reserve management, DLA clearance, the TAAR two-year window, and BADR qualification interact in ways that are specific to your circumstances. For a contractor with material reserves, the professional fee for an MVL and specialist tax advice is small relative to the tax at stake.
Our specialist accountants work with contractors at every stage of the company lifecycle, including planning and executing tax-efficient closures. If you are weighing up the options, take a look at our contractor accountancy services or get in touch through the contact page to discuss your specific situation.