How the UK tax system works for you and your company

For your Company

Your company conducts a trade or profession.

It takes in income and pays out expenses and pays staff, to generate a profit.

That profit is subject to Corporation tax: –

• at 19% on first £50,000,
• at 26.5% tax on profits up to £250,000 and
• at 25% on higher profits.

The company reports the profits each company year and pays the tax 9 months later.

For Staff

Staff and Directors are paid wages by their employer/your company for doing a job of work, as part of its expenses (hence these sums do not pay corporation tax but payroll taxes instead)

HMRC demand that the employer/your company perform the duties of an unpaid tax collector in respect of the taxes due on these staff wages, and then just pay the staff the net after taxes.

These PAYE taxes are t due to HMRC monthly or for a small company with a small payroll then maybe just every three months – due 19^th January etc.

HMRC issues a tax code in respect of each member of staff, for each job, to try to get the taxes correct and hence most staff with no investment income, seldom need to prepare a personal tax return.  However, HMRC can ask anyone to prepare a personal tax return to check their taxes.

For Shareholders

You and maybe others are shareholders of your company and as such are entitled to the profits after corporation tax, as dividends.

You as Director decide when to declare and pay out those dividends to shareholders i.e. you could keep the money in the company for working capital, investment etc.

There is no difference to the company taxes as a result of declaring dividends, but dividends when declared become income for shareholders so can affect their personal taxes.

Dividends declared by the company are paid out to shareholders in proportion to share ownership.

These dividends then count as your personal income when received, or credited to your loan account to draw down at leisure, and hence will become subject to personal income tax.

If you receive dividends of less than £500 in the year, then there is no income tax to pay.

Dividends count as your top slice of income when working out the income tax due: –

• You have a tax-free allowance of £12,570 – dividends in this band pay no income tax, but this band is usually taken up with other income e.g. wages.
• Next is the basic rate tax band of £37,700 – dividends in this band pay 8.75% income tax (10.75% from 6^th April 2026)
• Next is the higher rate tax band – dividends in this band pay 33.75% income tax (35.75% from 6^th April 2026)
• If total income exceeds £100,000 then you start to lose your tax-free allowance
• By the time income exceeds £125,140 then you are into the additional rate tax band – dividends in this band pay 39.35% income tax

This income tax on dividends is usually collected via a personal tax return, but if dividends are less than £10,000 then you can ask to pay it via a simple assessment.

Personal Tax returns

Since 1998 it has been the individual tax payers responsibility to prepare their tax return and assess the tax due.  Hence the personal tax return system since then has been known as one of self-assessment, and personal tax returns as SA returns, although officially they are form SA100.

So you have an obligation to advise HMRC of your income and complete a tax return if requested in order to calculate the correct tax due.

As mentioned above if you receive dividends of more than £10,000 then you need to complete a return, but HMRC can ask anyone to, and usually asks most directors to complete one.

Returns are due 31^st January in respect of the previous tax year.

Tax is also due 31^st January.

However if last years bill was over £1,000 then HMRC does not like to wait, so asks for two payments on account of half last years bill, on each of 31^st January in the tax year and 31^st July just after.  Hence your first tax bill of over £1,000 will be accompanied by your first payment on account request.

If we do not expect next years bill to be as large then we can ask for payments on account to be reduced, as they will be reduced to half the actual bill when next years return is completed and submitted.

Planning

The secret is to plan – put away the money for the taxes as you earn the money and know your due dates so you can “borrow” from the savings pot and not incur extra interest or penalties.

Unfortunately, the tax system has become very complicated so tailored planning for your circumstances is essential to be tax efficient.