In the latest Financial Matters column Fairhurst Accountants looks at the pros and cons of "close companies"

Small companies and their directors have suffered a number of tax rises in recent months and now also face additional onerous reporting requirements both by the company, and in individuals’ tax returns.

Since April 2025 companies have had to pay national insurance contributions (NICs) at 15m per cent on all remuneration paid to their directors above £5,000 a year, and on most benefits in kind.

Many directors who also own their companies have been able to avoid this charge, and the separate employee’s NICs on remuneration above £12,570 a year, by paying themselves dividends instead.

From April 6 the basic and higher rates of income tax on dividends went up by two percentage points, to 10.75 per cent basic rate and 35.75 per cent higher rate.

The personal allowance and the basic- and higher-rate thresholds have been frozen since 2021/22 and are now set to remain at their current levels until April 5 2031, a classic example of a stealth tax.

Because of the NIC burden, paying dividends rather than increasing salary is still more efficient for most directors, but the calculation of the best mix of salary and dividends depends on individual circumstances.

Pension contributions and whether the company can claim the Employment Allowance to reduce employer NICs – not available to single-director companies – need to be considered.

Also increased from April 6 is the rate of tax charged where a close company makes a loan to a director/shareholder – now 35.75 per cent rather than 33.75 per cent before.

A close company is broadly a company controlled by directors who are also shareholders, or by five or fewer shareholders.

When the loan is repaid (often by way of a dividend) the company can claim repayment of the tax charge.

In addition, directors who receive income from their company in the form of dividends must now show this income in the employment section of their tax return (although dividends are not actually employment income) and give much more detail than previously.

All this adds to the complexity and expense of running a limited company rather than self-employment.

Limited companies still offer many advantages, but the decision depends on your own circumstances and good professional advice is essential.