If you are a business owner, at some point, you must have thought about closing down your business or going through Insolvency. Mostly, insolvency leads to the liquidation of the company. Also, it is noted that business insolvencies are expected to jump 15% a year in 2022. An increased rate of 118% in CVLs (creditors’ voluntary liquidation) was seen in April 2021. To know more about how to close a limited company without paying taxes, one must understand what is meant by insolvency.
What is Meant by Insolvency?
If a company cannot pay its bills as they fall due, or the total value of its liabilities exceeds its assets, the business may be cash-flow insolvent or balance sheet insolvent and must stop trading.
However, Insolvency doesn’t necessarily mean liquidation for a company. Still, directors must minimise their creditors’ losses by voluntarily liquidating the company if it cannot be avoided.
In liquidation, the company is liable to pay certain taxes, without which liquidation cannot be fulfilled.
Although you cannot altogether avoid paying taxes without delving into the wrong side of things, you can, however, lower your tax liabilities to a certain extent.
It is always advisable to look at available options when making a significant decision, such as closing down a business. Although it is always recommended
to vouch for professional help to close down your business in the most optimal way, you can close down shop while minimising your tax liabilities with extra care and attention.
Before we move on towards ways to efficiently close down your business tax, let us look at what kind of taxes you would be liable to pay when closing your business.
Understanding how to avoid company insolvency and managing corporation tax effectively are essential when facing financial difficulties or considering closing your business.
Tax on Closing a Company
First, we need to familiarise ourselves with all the tax liabilities you could be liable for when closing a limited company.
Corporation Tax
When you decide to close your company and report your decision to Companies House, your existing corporate tax accounting period comes to an end—a new period starts, which goes on for 12 months or until the end of the winding-up process. During this period, you would have to file company tax returns regularly and pay corporate tax on profits that may arise from,
- Trade income, for example, income from investments.
- The revenue gained from the sale of assets to pay creditors.
During the winding-up process, the rate of taxes will remain the same as before deciding to wind up.
Understanding the complexities of UK corporation tax, how to reduce your tax bill, and the full scope of corporation tax for businesses.
Capital Gains Tax
Capital Gains Tax is applied to the profit earned from the sale of assets that increased in value from the time you got hold of them. The tax is applied to the gain you have made from the sale and not on the total amount received. When you decide to wind up, you would be liable to pay Capital Gains Tax in the case of a Members’ Voluntary Liquidation and the possibility of an Informal Strike-off if the total distributions are £25,000 or less and the relevant conditions are met.
For 2026/27, standard individual Capital Gains Tax rates are 18% on taxable gains within the unused basic rate band and 24% on gains above it.
Income Tax
As the name suggests, income tax is the tax you pay on your income. However, not all income is entirely taxable. However, the income earned from your business as a salary is something you would have to pay taxes on, and the company’s dividend is paid to the shareholders.
For 2026/27, salary income in England, Wales and Northern Ireland is generally taxed at 20% between £12,571 and £50,270, 40% between £50,271 and £125,140, and 45% above £125,140. The standard £12,570 Personal Allowance reduces by £1 for every £2 of adjusted net income above £100,000.
When closing a company, if you take out any retained earnings in the case of an Informal Strike-off, which amounts to more than £25,000, you would need to pay income tax on the amount. In the case of an MVL, you are usually required only to pay the CGT, but there are circumstances where you would also be liable for income tax, which are,
Winding-up distributions can be taxed as income where all the statutory anti-avoidance conditions are met. These include a minimum 5% interest, close-company status, involvement in the same or a similar activity within two years of the distribution, and an income-tax avoidance purpose.
Dividend Tax
Dividend Tax is the tax you pay on income earned via shares in a company in the form of a dividend. It is a form of income tax; however, the dividend tax rates are different from income tax rates.
- The basic rate of tax on dividends is 10.75%
- The higher rate of tax on dividends is 35.75%
- The additional rate of tax on dividends is 39.35%
When computing your income tax, you will add your dividend income to your total income and calculate the income tax. You may need to apply different tax rates on portions of your income, depending upon the source of income.
- Understanding The Workings of Dividend Tax in the UK
How to Pay the Least Tax Closing a Limited Company
Before we move on to the discussion regarding tax saving, we first need to address a fundamental misconception. Is Tax Avoidance and Tax Evasion the same thing?
We must answer this question as minimising tax requires scrutiny, and a single wrong step can come with dire consequences.
What Is Tax Avoidance?
Tax Avoidance is considered the legal way of mitigating your tax liability by using loopholes present in the compliance. The government itself provides these grey areas to provide some relief to business people and residents of the UK; for example, if you want to avoid paying income tax, you can open an Individual Savings Account (ISA), as all savings in an ISA account are tax-free. Similarly, traders and businessmen engaged in sole proprietorships can mitigate their tax liabilities by claiming expenses. Although that may sound quite shady by itself, it is not as severe as it sounds.
Using options like Individual Savings Accounts and claiming tax relief on employment expenses are legal ways to reduce your tax liability.
What Is Tax Evasion?
On the other hand, tax evasion is an illegal means of lowering your tax liability or not paying tax at all. For example, under-reporting revenues, moving profits to offshore accounts, falsifying information to the HMRC, not reporting an income source, overstating expenses, or claiming false deductions. Getting convicted in a case of tax evasion can have serious consequences that can lead to hefty fines and imprisonment or both.
Read our complete guide, to learn more about the difference between tax avoidance and tax evasion.
The bottom line is that one of them consists of legal, government-allowed methods to mitigate your tax liability. At the same time, the other one is a criminal activity that can lead to severe consequences. Make sure you pick out the correct way to minimise your tax liabilities.
If you are still unsure, it’s always a good idea to seek out professional limited company experts who can help you steer clear of immoral methods and keep you on the correct path.
Tax-Efficient Ways Of Closing A Limited Company
Regarding tax-efficient ways of closing a limited company, you are presented with the following options based on your company’s financial situation.
Formal Strike-Off
- The company hasn’t traded in the last three months.
- It hasn’t changed names in the last three months.
- The company is a going concern.
If you fulfil these requirements, your company can be struck off the Companies House register.
Going for a formal strike-off is advisable when the retained earnings from your business are less than £25,000.
How Does Formal Strike Off Help You Save Tax?
If having retained earnings lesser than £25,000, it is better to go for the strike-off. After all, you will only be liable to pay Capital Gains Tax because the amount can be treated as a capital distribution. So instead of spending 10.75%, 35.75% or 39.35% (depending on your marginal rate of personal tax) as income tax, qualifying distributions may receive capital treatment, with standard CGT rates of 18% or 24% on taxable gains, or 18% where Business Asset Disposal Relief applies in 2026/27.
Member’s Voluntary Liquidation (MVL)
Another option to close down your limited company without paying much tax is to apply for a member’s Voluntary Liquidation. To be eligible for initiating an MVL, you first need to fulfil specific requirements.
- The company must be solvent, with directors declaring that it can pay its debts, including interest, within no more than 12 months.
- MVL eligibility, Business Asset Disposal Relief and anti-avoidance rules have separate conditions and should be checked individually.
How Does An MVL Help You Save Tax?
Opting for an MVL is the most beneficial in the case when your retained earnings are more than £25,000. The dividend distributed with an MVL will be considered Capital Gains and taxed accordingly rather than the usual 10.75%, 35.75%, or 39.35 depending on your marginal personal tax rate as dividend tax. You would only be liable to pay 18% as Capital Gains tax for qualifying disposals from 6 April 2026 if you are entitled to Entrepreneurs’ Relief or business asset disposal (BAD) relief.
Tips To Legally Minimise Tax
We have designed a list to help you minimise your tax liabilities during your day-to-day business. Implementing these tips and tricks in your daily business might provide more financial stability and protect you from forced closures.
Legal Deductions
Make sure that you correctly use the reliefs provided to you by the government, such as Income Tax allowances, capital gains allowances, travel allowances, and much more. These legal deductions can help you save thousands on taxes every year.
Depreciation
Depreciation on tangible fixed assets is generally not deductible for Corporation Tax. Capital allowances may instead provide relief on qualifying expenditure.
Green Automobiles
With the recent changes and focus on CSR and eco-friendly products, the government allows you certain reliefs if you employ green automobiles in your business.
Bad Debts
Relief may be available for qualifying bad debts owed to your business, subject to the applicable tax and accounting rules.
Bonuses And Gifts
Provide your employees with bonuses on specific occasions, such as holding an annual dinner, providing Christmas bonuses, etc.
Invoicing
Keep proper track of your transactions by keeping invoices. This will help you compute taxable income more efficiently.
Bank Reconciliation
Always reconcile your bank statements to ensure that everything is per your records. This would help get a more accurate description of your taxable income by making all expenses and earnings transparent.
Conclusion
Legal tax avoidance during the closure of your company might be a little trickier than most of us expect. That’s why it is advised that you always seek out professional help when it comes to closing your limited company without paying taxes. A professional accountant will help you understand your financial position, your tax liabilities, and what would be the best mode of action for your business.
At Clear House Accountants, with the help of our team of expert advisors, we help clients find the most optimal and tax-efficient route for their business and help you liquidate your business most cost-effectively.
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