The short answer
A useful rule of thumb: set aside roughly 30% of your company's profit to cover Corporation Tax plus your personal dividend tax — and, separately, keep 100% of the VAT you collect, because that was never your money.
It's only a starting point. Higher earners drawing dividends into the higher-rate band should reserve more. The precise number comes from tracking your actual position as you go.
The single most common cause of stress for limited company contractors isn't earning the money — it's owing tax they've already spent. Unlike an employee, no one deducts your tax at source. The cash that lands in your business account includes money that belongs to HMRC, and the deadlines arrive months after the work. A simple reserving habit fixes this.
The taxes you're actually reserving for
| Tax | Who pays | Rate / threshold (2025/26) |
|---|---|---|
| Corporation Tax | The company, on profit | 19% up to £50,000; 25% from £250,000; marginal relief between |
| VAT | The company, if registered | Standard rate 20%; registration threshold £90,000 taxable turnover |
| Dividend tax | You, via Self Assessment | 8.75% / 33.75% / 39.35% above the £500 allowance |
| PAYE & NI | On any salary | Deducted via payroll as you go |
Why VAT is different — keep it ring-fenced
If you're VAT-registered, you add 20% to your invoices and hand it to HMRC each quarter (less the VAT you reclaim on purchases). That money flows through your account but is never yours. The cleanest habit is to move the VAT element to a separate pot the moment an invoice is paid. Contractors who treat the VAT-inclusive figure as "income" are the ones who get caught short on the quarterly return.
You must register for VAT once your taxable turnover passes £90,000 in any rolling 12 months (you can register voluntarily below that). Whether the standard scheme or a flat-rate scheme is better depends on how much VAT you incur on purchases — worth a conversation with your accountant.
The 30% rule of thumb — and when to flex it
For Corporation Tax plus dividend tax combined, reserving around 30% of profit is a sensible default for a typical contractor who keeps total income near or below the higher-rate threshold:
- Corporation Tax takes 19–25% of profit before dividends are even drawn.
- Dividend tax then adds 8.75% on most dividends within the basic-rate band.
Flex it upward if you draw dividends into the higher-rate band (33.75%) — at that point a 30% blanket reserve won't be enough, and something closer to 35–40% on the higher-band portion is safer. Flex it down only if you're deliberately retaining profit in the company rather than distributing it.
A worked example
Illustrative — company profit £60,000, salary £12,570 already taken
- Profit chargeable to Corporation Tax (after the deductible salary and employer NI): roughly £46,000.
- Corporation Tax at 19%: about £8,700 — reserve this first.
- Dividends available from the ~£37,000 left after CT; if total income stays within the basic-rate band, dividend tax is around 8.75% on the taxable portion — perhaps £2,500–£3,000.
- Total to reserve: roughly £11,000–£12,000 — close to the 30%-of-profit rule of thumb. Plus any VAT, kept entirely separate.
Figures are rounded and illustrative — your numbers depend on your exact salary, expenses, other income and Corporation Tax rate. The discipline matters more than the precision: reserve as the money comes in, not at the deadline.
The contractors who never sweat a tax deadline aren't earning more — they just never treat HMRC's money as their own. Reserve on the way in, and the deadline becomes a non-event.
Know the deadlines
- Corporation Tax — pay within 9 months and 1 day of your accounting period end; file the CT600 within 12 months.
- VAT — usually quarterly, one month and seven days after the quarter end.
- Self Assessment (your dividend tax) — file and pay by 31 January, with payments on account where applicable.
A real-time view of what you owe makes all of this trivial — see our take-home calculator for a quick estimate, or read the salary vs dividends guide to plan how much to draw in the first place.
Frequently asked questions
How much should a Ltd contractor set aside for tax?
Around 30% of company profit for Corporation Tax plus personal dividend tax, and separately 100% of any VAT you collect. Reserve more if you draw dividends into the higher-rate band.
What taxes does a UK Ltd contractor pay?
Corporation Tax on profit (19–25%), VAT if registered (threshold £90,000), personal dividend tax above the £500 allowance, and PAYE/NI on any salary.
Should I set aside VAT separately?
Yes — VAT you charge is collected for HMRC and isn't income. Keep it in a separate pot so it's always there for the quarterly return.
When is Corporation Tax due?
For most small companies, within 9 months and 1 day of your accounting period end; the CT600 return is filed within 12 months.
This guide is general information for UK Ltd company contractors based on 2025/26 rates and thresholds, and is not regulated tax advice. The worked figures are illustrative and rounded. Confirm current rates and deadlines on gov.uk and your numbers with a qualified accountant.