Setting Up a Limited Company: 8 Tax Tips for 2026/27

Your business structure decides which taxes you pay. A sole trader pays income tax at 20%, 40% or 45% on all profits, plus Class 4 National Insurance. A limited company pays corporation tax at 19% to 25%, and you then pay personal tax only on the salary and dividends you draw. Salary and employer's National Insurance reduce the company's taxable profit; dividends do not. The personal allowance (£12,570), basic rate band (£37,700) and additional rate threshold (£125,140) are frozen until April 2031, so plan with those figures in mind.

A limited company is a separate legal person. If it fails, shareholders lose only the share capital they put in, not their home or savings. For example, if a company with £100 of share capital collapses owing £25,000, the shareholder's exposure is the £100. A sole trader, by contrast, is personally liable for every business debt. Remember the flip side: the company's money belongs to the company, not to you.

You do not need a formation agent. Companies House's online service registers a company limited by shares using model articles for £100, usually within 24 hours, and can set up corporation tax and PAYE at the same time. Postal registration on form IN01 costs £124 and takes 8–10 days. Since November 2025 every director and person with significant control must verify their identity and quote their Companies House personal code.

Dividends must be paid equally per share within a class. Creating separate classes (A shares, B shares and so on) lets you declare a different dividend for each shareholder. You can also give one class the votes and another a bigger share of profit. If you missed this at formation, you can add new classes later if your articles allow. Check the rights carefully so each shareholder still qualifies for Business Asset Disposal Relief on exit.

If your company did not register for corporation tax at formation, for example because it started dormant, you must tell HMRC within three months of starting any business activity. Missing the deadline can trigger a late notification penalty based on the tax at stake, on top of late payment penalties and interest. Set a diary reminder the day trading begins.

Corporation tax is due nine months and one day after your year end, so choosing the year end chooses your payment date. A seasonal business should aim for a payment date in its busy months. A garden landscaping company with a 31 October year end pays on 1 August, when cash is strong. Avoid a 30 April year end if you also pay self assessment, as both bills would land around 31 January and 1 February.

Money spent getting ready to trade is not wasted for tax. Revenue costs incurred up to seven years before trading starts are treated as spent on the first day of trade, provided they would have been deductible later. Equipment bought before trading is treated the same way for capital allowances. Keep receipts for market research, website build, legal fees and tools from day one.

Buying an established business can be less risky than a start-up, and lenders are often keener to fund it. With a company, you can buy its shares or its assets. Buying assets lets you claim capital allowances on equipment and leaves old liabilities behind. Buying shares is often what the seller prefers, because it may qualify for Business Asset Disposal Relief. Take advice before you agree the structure.