Why do I pay Corporation Tax & Personal Tax – shouldn’t I just have one tax bill? Am I not paying too much tax?

Corporation Tax blog header

You as a director and your business are classed as two separate entities – therefore both are taxable as Corporation Tax & Personal Tax.

  • Corporation Tax is based on the profits of the company after your salary, but before dividends are taken out – and is currently payable at 19% for profits under £50k
  • Your salary is classed as a tax-deductible expense, so reduces the company profits.
  • A director’s personal tax return covers your salary, plus the dividends taken out of the company (plus any other income – interest/rental/other investments etc).
  • If you are a sole director then salary is usually taken up to the NI (National Insurance) level, then dividends are declared for the rest of the funds extracted from the company.
  • Dividends will use up the rest of your tax-free personal allowance, £1k is tax free, then the remainder is taxed at 8.25%.

This is the most tax efficient way of structuring things, making the most of your allowances and lower tax rates.  For example, if you were a sole trader, with a profit under £50k you’ll be paying 20% tax, plus 9% National Insurance, so there is a total of 29% tax to pay, plus class 3 NI of £179.40.  If you took all the money out of the business as salary, then you’d get your tax allowance, but would be paying NI and have an effective rate of 33.8% in tax & NI.

As a Limited company you have more tax allowances and no NI to pay as a sole director (although your salary is high enough to get your tick for the year for state benefits), and a total combined tax rate of 27.25%.

Blog Suggestion: What is the difference between salary and dividends?


If you’d like to understand your tax options and have a comparison to see if a Limited company structure is better for your tax efficiency, please book a discovery call with us today.