The truth about how company directors are being squeezed by HMRC

Limited company directors in the UK are under increasing pressure, with little support in return. They’re expected to meet every business tax and compliance demand, yet when government relief is handed out, they’re often excluded. As National Insurance (NI) costs rise, tax rules tighten, and paperwork piles up, many are questioning whether HMRC recognises the realities of running a small company.

While directors can be eligible for statutory benefits, their common pay structure often leaves them without a practical safety net. In addition, directors’ pay comes from the company itself - so they bear the financial burden. And unlike sole traders, they’re frequently shut out of targeted support schemes. The result? They’re taxed like a business but supported like individuals – left to shoulder growing responsibilities with few protections.

Taxed at every turn

Directors are subject to two layers of tax. First, their company pays Corporation Tax on profits – with rates scaling up depending on profitability. Then, when they pay themselves via salaries or dividends, they face personal tax liabilities on top. It’s a juggling act: many directors take a low salary to minimise NI contributions and top up their income with dividends, which are taxed at lower rates.

That strategy is becoming less effective. As of April 2025, employer NICs rose from 13.8% to 15%, and the threshold for paying those contributions dropped to just £5,000 per year. That means even modest salaries now incur a higher cost to the company. The dividend allowance has also shrunk to just £500, pushing up the tax burden for those relying on dividend income.

There are still a few tax-efficient perks, such as for electric vehicles, mobile phones, and “trivial benefits” of up to £300 a year, but these are tightly policed by HMRC. Meanwhile, directors earning above £100,000 lose access to the personal tax allowance altogether, with it disappearing entirely above £125,140.

The pressure to get it right

All of this has left many directors questioning the value of incorporation. Rising costs, shrinking allowances, and extra compliance work mean running a limited company today looks very different and is more onerous from even a few months ago.

Some are reassessing their company structures, while others are rethinking how they draw income. But getting it wrong – from missed deadlines to poorly documented dividends – can be costly. HMRC is stepping up enforcement, with real penalties for errors and omissions. Companies House is also tightening its rules. Even micro-entities may soon be required to publish their profit and loss accounts, which can be daunting for small businesses with just a handful of clients.

In some instances, business owners are even looking to leave the UK, a reflection on the challenges they are facing. This, in turn, has a negative effect on our economy so the government should be incentivizing businesses to stay and prosper in this country.

Small business owners often find themselves falling through the cracks. They pay like businesses but aren’t eligible for the support businesses get. They work like employees but can’t claim the protections employees enjoy. And while sole traders are often at the centre of support schemes, limited company directors are frequently excluded.

As a result, a growing number of small business owners feel the system neither recognises nor rewards the realities of how they work.

Staying ahead of the curve

There’s no silver bullet, but using the right tools can make a big difference, especially platforms designed to simplify reporting, generate accurate records, and stay in step with changing requirements.

Some providers are already stepping in to do just that by offering software and services that automate tax filings, create dividend paperwork, and flag issues before they become problems. Such tools do the heavy lifting and allow small companies to focus on what really matters: getting on with business.

Consider the example of a director juggling a modest salary with quarterly dividend payments. Without automated support, they’re stuck generating board minutes, updating ledgers, and ensuring every transaction is properly documented. With the right solution, that entire process becomes streamlined, reducing the risk of costly mistakes and freeing up time for the work they actually enjoy.

Running a company isn’t getting easier. But with the right support, staying compliant shouldn’t be what keeps you up at night.