There are a number of considerable tax advantages for forming a limited company. Owners and/or directors of limited companies like have the flexibility to manipulate payment types and the timing of these payments. This makes it possible to pay a lower tax rate on earnings. Typically, these salaries are taxes under the PAYE system and the NICs for employers and employees are chargeable. The dividends of companies however are taxed differently and do not attract national insurance.

Many find it tax efficient to set a salary level per month and then take the remainder of their income for the month in dividends. This can actually help to save several thousands every year. If the owner/director is married and the spouse or partner does not have an income that exceeds specific limits annually, it can also be tax efficient to split the shareholding between the owner and his or her spouse. This also helps to lower the overall tax rate.


A higher tax rate can be avoided by apportioning a certain percentage of the shareholding to the spouse to that a specific amount of the dividends are paid directly to him or her. This also helps to equate a substantial tax savings each year. It is important however to note that before attempting this strategy, one should be certain that the combined income of the spouse does not exceed the specified amounts. Otherwise a higher tax rate will be applied.

A limited company also allows for flexibility of the contractor to defer income from the tax year where a higher tax rate will be payable. The income can be deferred to a year where a lower rate will be due. This can be done in instances where a change in official tax rates is seen or because of a change in personal circumstances.

Owners can lock their income away in the company for a few years and see other significant tax savings. Once the company has fulfilled the purpose to which it has been formed, the director can close down the company via Member’s Voluntary Liquidation. The funds from the company will then be distributed as capital. Shareholders can then take advantage of the CGT annual exemption where the balance of the revenue is taxed at 10 percent.

If a contractor is planning to retire and has built up a rather large amount of funds, he or she can choose to not withdraw those funds as capital but can continue to receive them as dividends. This can be done to keep the overall income level under the specific amount where no further tax will be due. If and when a company is voluntarily registered, owners can take advantage of an anomaly in the VAT system where the company charges VAT to clients at one percent but then only has to pay a lower amount depending on the type of business in question. Any or all of these tax strategies can be used to lower the payable tax and provide a much more beneficial financial response to the business.