Company Year-End Tax Planning Checklist
Here is a number that surprises almost every new client I meet: on £80,000 of company profit, a director who takes £50,000 of it as dividends can end up paying about £25,800 in tax between the company and themselves. That is roughly 32p of every pound earned.
It isn't a trick. It isn't a loophole closing. It is simply how two separate taxes stack on top of each other.
Corporation Tax and dividends are often described as if they were two unrelated topics. One belongs to the company, the other belongs to you. In practice, they are two halves of the same journey. Profit is earned by the company, taxed in the company, paid out to you, and then taxed again in your hands. Understand that chain, and many of the decisions that look confusing become much easier.
I work with limited company directors across Tunbridge Wells, Tonbridge, Sevenoaks and the wider Kent area, and the same questions come up every year. How much tax will the company pay? How much can I safely take out? Why is there profit on paper but so little in the bank? This guide answers all three, using the 2026–27 rates, with worked examples you can check against your own figures.
Before we look at each piece in detail, it helps to see the whole route. A pound of profit in a limited company travels through four stages.
Every stage has its own rules, its own deadlines and its own traps. The first two belong to the company. The last two connect the company to you. The reason mistakes happen is that people tend to think about one stage at a time, rather than the whole route.
A useful way to hold it in your head: the company pays tax first, and you pay tax second. A dividend can only come from what the company has left after the first.
Everything starts with profit. But "profit" means different things depending on who is asking, and this is where the first confusion arises.
Accounting profit is the figure in your annual accounts. It is your turnover, less the costs of running the business, less depreciation, with certain adjustments for timing. It follows accounting rules, and it is what your bank manager, your investors and Companies House will see.
Accounting profit is not the figure on which Corporation Tax is charged. That comes next.
Taxable profit starts with the accounting figure and then adjusts it. Some costs that appear in the accounts aren't allowed for tax, such as client entertainment. Depreciation is added back, because tax relief for equipment comes through capital allowances instead. Some tax reliefs, such as employer pension contributions or research and development, are applied at this stage.
So you can have two different "profit" numbers for the same year. One is in your accounts. The other is on your Company Tax Return. Both are right. They simply answer different questions.
I once sat with a Paddock Wood landscaper who was baffled that his accountant had quoted him a tax figure that didn't seem to match the profit in his accounts. When we went through it line by line, the answer was simple. He had spent £3,000 on client hospitality that he assumed was deductible. It wasn't. Once he saw the reconciliation, the difference made perfect sense.
For most small companies, taxable profit comes from trading. But it may also include interest, rent from property, and chargeable gains on assets the company sells. If you have more than one source, they are all added together before the tax is calculated.
If the company pays you a salary, that salary is a cost of the business and reduces the company's profit. This is a key difference between salary and dividends. Salary is deducted before Corporation Tax is calculated. Dividends are not. We will come back to this, because it affects how much you take and in what form.
Once the taxable profit is known, Corporation Tax is applied to it. For a company with no associated companies and a 12-month accounting period, the rates for the 2026–27 financial year are as follows.
In the band between £50,000 and £250,000, the company pays the main rate of 25% and then deducts a relief. The formula is 25% of the profit, minus 3/200 of the difference between £250,000 and the profit. The effect is that extra profit in that band is effectively taxed at 26.5%.
For a company with £80,000 of taxable profit, the sums run like this: 25% of £80,000 is £20,000. The relief is 3/200 of £170,000, which is £2,550. The Corporation Tax bill is £17,450.
That leaves £62,550 of profit after tax. This is the pot from which dividends can be paid.
Two things can change the thresholds. If you control other companies, the £50,000 and £250,000 limits are divided between them. And if your accounting period is shorter than 12 months, the limits are reduced in proportion. Directors with more than one company sometimes overlook this, and it can move a profit into a higher band without warning.
For most small companies, Corporation Tax is due nine months and one day after the end of the accounting period. A company with a 31 March 2027 year-end must pay by 1 January 2028. The Company Tax Return is due three months later, twelve months after the period ends.
This timing matters for what comes next. By the time the tax is due, you may have been taking dividends for months. The bill still arrives, and it must still be paid out of company money.
A dividend is a payment from the company to its shareholders, out of profits that have already been taxed. It is not a salary, it is not an expense, and the company gets no tax relief for it.
A company can only pay a dividend if it has enough distributable profits. In plain terms, that means accumulated profits after tax, less any losses and earlier distributions. The cash balance in the bank has no bearing on the legal test.
If a company pays a dividend without enough profit, it is unlawful. In some circumstances, the shareholder may have to repay it. That is why we always check the reserves before a dividend is declared.
Every dividend should be supported by a board minute, which records that the directors approved it, and a dividend voucher, which tells the shareholder the amount, the date and the company's details. Even if you are the sole director and the only shareholder, the paperwork should exist. It is the evidence that a payment was a dividend and not a loan or a disguised salary.
Most small companies pay interim dividends during the year, declared by the directors as and when they choose. A final dividend is recommended after the year-end and approved by the shareholders. In a one-person company the distinction is mostly about timing and paperwork. The key is that each dividend is documented on the day, not rebuilt months afterwards.
Dividends are paid in proportion to the shares each person holds. If two people hold 50% each, a £20,000 dividend means £10,000 each. If you want to pay shareholders differently, the share structure has to allow for it, which usually means separate share classes. This is an area where taking advice first is wise, especially in family companies, because HMRC has specific rules about income shifted between spouses.
From 6 April 2026, the dividend tax rates are:
The first £500 of dividends each year is covered by the dividend allowance and is not taxed. Dividends sit on top of your other income, so a salary of £12,570 uses up your personal allowance first, and the dividends then fall into the bands above.
Let's finish the example. Say you take £50,000 as a dividend, and you also receive a salary of £12,570 from the company. The salary uses your personal allowance. Of the £50,000 dividend, the first £500 is covered by the allowance. Another £37,200 falls in the basic rate band at 10.75%, giving £3,999. The remaining £12,300 falls in the higher rate band at 35.75%, giving £4,397.25. Your personal tax on the dividend is £8,396.25.
Put the two layers together and the picture is clear.
That total is about 32% of the original £80,000. For a basic rate director with smaller dividends, the overall rate is lower. For a higher rate director, the second layer bites harder. Either way, the sum is worth knowing before you decide how much to take.
Of all the sections in this guide, this is the one I most want you to remember. Profit is a figure on paper. Cash is money you can spend. They are rarely the same.
Several things create the gap.
Return to the company with £80,000 of profit and £62,550 after tax. Suppose that at the year-end the company shows a bank balance of £41,000. A further £21,000 of invoices is outstanding from customers. The company owes £7,500 of VAT and has a Corporation Tax bill of £17,450 due in nine months.
On paper, the company has £62,550 of reserves. A £50,000 dividend is perfectly lawful. But the bank balance is £41,000. If the director takes the full £50,000, the account is overdrawn. If the director takes £41,000, the company can't pay the VAT. And even if the director takes only £20,000, there are tax bills to meet in the months ahead.
The right answer isn't the legal limit. It is the amount that leaves enough in the bank for everything the company owes. In this case, that might be something closer to £15,000 to £20,000 until the customers pay.
A client in Tonbridge once made precisely this mistake. His accounts showed a healthy profit, his reserves were strong, and he drew a large dividend a few weeks before the year-end. Then his Corporation Tax bill arrived and there was almost nothing in the account to meet it. He borrowed against a credit card to pay HMRC on time. It was entirely avoidable. If he had simply put the tax aside as he went, he would have taken a smaller dividend, and slept better.
Here is the method I recommend to clients.
It takes ten minutes a month. It protects you from the most common cash-flow shock a small company faces.
The two taxes follow different calendars, and the gap between them catches people out.
Corporation Tax is paid by the company, nine months and one day after its year-end. A company with a 31 March year-end pays on 1 January.
Dividend tax is paid by you through Self Assessment. Dividends paid between 6 April 2026 and 5 April 2027 are reported on the tax return for 2026–27, due by 31 January 2028, and the tax is normally payable on the same date. If your tax bill is large enough, HMRC may also ask for payments on account towards the following year, on 31 January and 31 July.
These dates don't line up with each other. You might take a dividend in June, have the company's tax bill fall due the following January, and then face your personal tax bill on a different 31 January. Without a plan, it is easy for two large payments to land close together.
I tell clients to treat the dividend tax like any other bill from the day the dividend is paid. When you pay yourself £10,000 of dividends at the higher rate, around £3,575 of that is already owed to HMRC. Move it to a savings account at once, and it won't be a surprise.
Understanding how the taxes interact opens up some practical choices.
Salary reduces company profit and so reduces Corporation Tax, but it may attract National Insurance. Dividends don't reduce company profit, but they attract less personal tax at the basic rate. For many single-director companies, a salary around the personal allowance, topped up with dividends, is still sensible. The right answer depends on your other income and profit. Our guide to salary versus dividends works through the figures.
You don't have to take everything out. Profit left in the company has already borne Corporation Tax, and you pay no personal tax until it is paid out. This can be useful in a year when you don't need the money, or when your income would otherwise push you into a higher band. A later year with lower income may be a cheaper time to extract the same profit. Our guide to leaving profits in your limited company explains when this makes sense.
An employer pension contribution reduces the company's taxable profit, so it saves Corporation Tax, and it doesn't create dividend tax or National Insurance. For a company with £60,000 of profit, a £10,000 contribution brings profit down to £50,000 and reduces the Corporation Tax bill from £12,150 to £9,500, a saving of £2,650. The money isn't available until pension age, so it needs to fit your wider plans.
Three months before the year-end is the best time to look at both taxes together. By then you know roughly what profit will be, you can see the marginal relief position, and you still have time to act on pensions, equipment and the pattern of your dividends.
Quick answer: A limited company pays Corporation Tax on its profit first. What remains after tax can be paid to shareholders as dividends, and the shareholder then pays dividend tax on what they receive. The company gets no tax relief for the dividend. The two taxes add up, and neither one guarantees there is cash available.
What this means for a company director: You should think of your company's profit as being shared three ways: HMRC takes a share through Corporation Tax, HMRC takes another share through dividend tax once the money reaches you, and you keep the rest. You also need to leave enough cash in the company to pay its own bills, including the Corporation Tax bill that falls due after the year-end.
Example: A company with £80,000 of taxable profit pays £17,450 of Corporation Tax, leaving £62,550. The director takes a £50,000 dividend and, with a £12,570 salary, pays £8,396.25 of dividend tax. Total tax is £25,846.25, the director receives £41,603.75 and £12,550 stays in the company. If the company's bank balance is only £41,000, that dividend may not be affordable even though the reserves allow it.
Common mistakes: Paying dividends because the bank balance looks healthy, without checking reserves. Paying dividends from reserves without checking the cash. Forgetting that the company's tax bill is still to come. Skipping the minutes and vouchers. Forgetting your own dividend tax until 31 January. Assuming the dividend reduces the company's tax.
When should you speak to an accountant? Before the year-end, to review profit, tax and dividend plans together. Before a large dividend. When profit falls near £50,000 or £250,000, where the Corporation Tax rate changes. When there is more than one shareholder. And when your income could move you into a higher rate band.
Because the two taxes interact, errors in one tend to cause trouble in the other. Here are the ones I see most.
A healthy bank balance can mean a healthy business. It can also mean unpaid VAT, an unpaid tax bill or customer deposits for work that hasn't been done. Always check the accounts, not just the bank.
If a company has made losses in earlier years, those losses reduce the profit available. A good year doesn't automatically create distributable reserves if there are past losses to absorb.
A director who plans only for Corporation Tax often forgets the tax that falls on the dividend. A £50,000 dividend can bring a personal bill of more than £8,000. It needs to be budgeted for.
Taking money out without a dividend, a salary or a loan record creates an overdrawn director's loan account. If that is still outstanding nine months and one day after the year-end, the company pays a section 455 charge of 35.75% for loans made on or after 6 April 2026. The tax is refundable once the loan is repaid, but it costs cash in the meantime.
Dividends need minutes and vouchers dated at the time. Trying to recreate them months later is awkward and weakens your evidence.
A dividend counts as income in the tax year in which it is paid. If you are close to a threshold, paying a dividend a few days before or after 5 April can change the tax charged, and may move it into a different year's bands.
If you would like help seeing how your own profit, Corporation Tax and dividends fit together, we'd be delighted to hear from you. At Peter Hodgson & Co, we work with sole traders, contractors and company directors across Tunbridge Wells, Tonbridge, Sevenoaks and the rest of Kent and the South East. We can help you forecast your tax bills, decide how much to take out, and keep enough cash in the company for everything it owes.
You can complete the "Contact Us" form on our website, call us on 01892 515 733, or send us an email at info@peterhodgson.co.uk.
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
Similar Articles
Newsletter
.svg)
.svg)
