Corporation Tax vs Income Tax —
what's the difference?

One of the most common points of confusion for newly incorporated limited company directors is the relationship between Corporation Tax and Income Tax. They are two entirely separate taxes, charged on different things, at different rates, collected through different processes — and both apply to you at the same time. Understanding how they interact is fundamental to running your company correctly and planning your finances efficiently.

This post explains what each tax covers, who pays it, how it is calculated, and how the two taxes work together in the context of a typical small limited company.

The core distinction

The single most important thing to understand is this: Corporation Tax is paid by the company. Income Tax is paid by you personally.

A limited company is a separate legal entity from its director and shareholders. It earns its own income, pays its own bills, and — crucially — pays its own tax. That tax is Corporation Tax, charged on the company's taxable profits.

When money moves from the company to you — whether as a salary, a dividend, or any other form of remuneration — that money becomes your personal income and may be subject to Income Tax in your hands. The two taxes operate in sequence, not instead of each other.

Corporation Tax — the company's tax

Corporation Tax is charged on a limited company's taxable profits. These include trading income, investment income, and capital gains on the disposal of assets. The tax is calculated after allowable business expenses have been deducted, but before any dividends are paid to shareholders.

For the 2026/27 financial year, the rates are:

Taxable Profit	Rate
Up to £50,000	19% (small profits rate)
£50,001 – £250,000	Tapering — effective marginal rate of ~26.5%
Over £250,000	25% (main rate)

Unlike Income Tax, there is no personal allowance for companies. Corporation Tax is due on all taxable profit from the first pound. The tax must be paid to HMRC nine months and one day after the end of the company's accounting period, and the CT600 return filed within 12 months of that date.

One important point: dividends paid to shareholders are not a deductible expense for Corporation Tax purposes. The company pays Corporation Tax on its profits first, and dividends are then paid from the remaining post-tax profit. This is a key reason why director salary is often structured carefully — salary is a deductible expense that reduces the company's taxable profit, while dividends are not.

Income Tax — your personal tax

Income Tax is charged on an individual's personal income. For a limited company director, this typically comes from two sources: salary drawn through the company's payroll, and dividends received from the company.

Unlike Corporation Tax, individuals benefit from a personal allowance — an amount of income that can be received entirely free of Income Tax. For 2026/27, that allowance is £12,570, frozen at this level until at least April 2031. Above the personal allowance, Income Tax applies at the following rates for taxpayers in England, Wales, and Northern Ireland:

Income Band (2026/27)	Income Tax Rate
Up to £12,570	0% (personal allowance)
£12,571 – £50,270	20% (basic rate)
£50,271 – £125,140	40% (higher rate)
Over £125,140	45% (additional rate)

For directors earning above £100,000, the personal allowance tapers at £1 for every £2 of income above that threshold, disappearing entirely at £125,140 — creating an effective marginal rate of 60% on income between £100,000 and £125,140. This is one of the most punishing bands in the UK tax system and significantly affects how high-earning directors structure their remuneration.

Dividend income — its own set of rules

Dividends are taxed separately from salary under Income Tax, at lower rates than employment income but without the benefit of National Insurance exemption removing them from the calculation entirely. From April 2026, the dividend tax rates increased by 2 percentage points:

Tax Band	Dividend Tax Rate (from April 2026)
Basic rate	10.75%
Higher rate	35.75%
Additional rate	39.35%

The first £500 of dividend income each year is covered by the dividend allowance and taxed at 0%. This allowance has fallen sharply in recent years — it was £2,000 as recently as 2022/23 — making tax-efficient dividend extraction increasingly important for directors who rely on dividends as their primary income source.

To work out which band your dividends fall into, you add your total dividend income to your other income for the year. Dividends are treated as the top slice of income, sitting above salary, pension income, and savings interest.

National Insurance — the third piece

National Insurance sits alongside Income Tax but is technically a separate charge. For directors:

• Salary attracts both employee National Insurance (8% on earnings between £12,570 and £50,270 in 2026/27) and employer National Insurance (15% on earnings above £5,000 from April 2025, paid by the company and deductible for Corporation Tax purposes)
• Dividends are not subject to National Insurance — this is a significant part of their tax efficiency for directors

The employer NIC is a company cost, not a personal one, but it reduces the profit available to be retained or distributed as dividends. The optimal salary level for most small company directors sits at the threshold where the employer NIC begins, or at the personal allowance — the precise figure depends on whether the Employment Allowance is available to the company.

How the two taxes interact — a summary

	Corporation Tax	Income Tax
Who pays	The company	You personally
What it applies to	Company profits	Your personal income
Personal allowance	None — all profits taxable	£12,570 (2026/27)
Rates	19% / 25%	20% / 40% / 45%
When paid	9 months and 1 day after year-end	31 January following the tax year
How filed	CT600 with HMRC	Self Assessment SA100 with HMRC
Salary deductible?	Yes — reduces taxable profit	N/A
Dividends deductible?	No — paid from post-tax profit	Taxed at dividend rates

Why the distinction matters in practice

Understanding that Corporation Tax and Income Tax are separate — and that both apply simultaneously — has real consequences for how you structure your remuneration as a director.

The salary you draw reduces the company's Corporation Tax bill (because it is a deductible expense) but increases your personal Income Tax and National Insurance liability. Dividends are more tax-efficient personally (lower rates, no NI) but do not reduce Corporation Tax. Pension contributions made by the company reduce Corporation Tax and avoid Income Tax entirely if structured correctly.

Navigating the interplay between these taxes is one of the most practical and valuable things an accountant does for a limited company director — the right balance between salary, dividends, and pension contributions is rarely obvious and changes as rates and thresholds shift.

This article is for general information purposes and does not constitute tax advice. Tax rates and allowances can change. Always speak to a qualified accountant before making decisions about your remuneration structure.