Home / Guides / Closing a Limited Company — Tax Implications
Closing a limited company is not simply a matter of stopping trading and informing Companies House. The method of closure determines the tax treatment of any remaining company assets and accumulated profit — and the difference between choosing correctly and incorrectly can run to tens of thousands of pounds in additional tax.
Last updated May 2026. Written by the LimitedCompanyTaxCalculator.co.uk editorial team and reviewed against current GOV.UK and HMRC guidance. Results are estimates for planning only and are not tax, accounting or financial advice.
A Members' Voluntary Liquidation (MVL) is a formal solvent winding-up process. The company appoints a licensed insolvency practitioner as liquidator, the liquidator realises and distributes the company's assets, and the company is then formally dissolved. MVL is used where the company has significant retained cash or other assets that need to be distributed to shareholders before dissolution.
Striking off — also called dissolution under Companies Act 2006 — is a simpler administrative process. The directors apply to Companies House to have the company struck off the register. It is suitable for dormant companies or those that have ceased trading with minimal assets. The critical limitation is the £25,000 threshold: if the total assets distributed during striking off exceed £25,000, the distribution is treated as income rather than a capital gain.
The choice between MVL and striking off is not simply one of cost or simplicity. It is primarily determined by the amount of retained profit in the company and whether Business Asset Disposal Relief is available. An MVL costs more — typically £1,000–£3,000 in practitioner fees — but the tax saving from treating the distribution as a capital gain (with BADR at 10% if available) rather than dividend income can be substantial.
In an MVL, distributions to shareholders are treated as capital distributions rather than dividend income. This distinction is fundamental: capital gains are subject to capital gains tax (CGT), not income tax. Where Business Asset Disposal Relief (BADR) applies, the rate of CGT on qualifying gains is 10%, making MVL distributions materially more efficient than taking the same retained profit as dividends.
BADR is available on the disposal of shares in a qualifying trading company where the shareholder has owned at least 5% of the shares, been a director or employee, and held the shares for at least two years before the disposal date. The lifetime allowance for BADR gains is £1 million. Most owner-managed trading companies readily meet these conditions, making BADR the default assumption for an MVL where these criteria are satisfied.
By way of contrast, retaining £100,000 in the company and extracting it as dividends attracts basic rate dividend tax of 8.75% on the basic rate portion and 33.75% on the higher rate portion. The same £100,000 extracted via MVL with BADR pays CGT at 10% on the gain above the annual CGT exemption (£3,000 for 2026/27). The tax saving can easily exceed £20,000 on a £100,000 distribution.
For companies with total assets of £25,000 or less, striking off is a practical alternative to MVL. Distributions during a striking off are treated as capital returns up to this threshold, meaning CGT rates apply. With BADR potentially available, the effective rate can be as low as 10% — very similar to MVL but at lower cost and administrative burden.
Where total assets exceed £25,000, the excess above that threshold is treated as income (specifically, a dividend income equivalent) rather than a capital gain. For a company with £40,000 in retained cash, striking off means the first £25,000 is capital and the remaining £15,000 is treated as income — potentially taxed at 33.75% higher-rate dividend rates rather than 10% CGT with BADR. In this scenario, the £15,000 income treatment adds approximately £3,600 in additional personal tax versus treating the whole amount as a BADR capital gain.
For companies with retained profits significantly above £25,000, MVL is almost always more efficient from a tax perspective. The professional fee cost of £1,000–£3,000 is small relative to the tax saving at typical retained profit levels. Some directors misjudge this because the striking off process looks administratively simpler — but the tax consequences of the wrong choice make the MVL cost look trivial.
The most effective pre-closure planning happens before the decision to close, not after. The key question is how to reduce the taxable profit retained in the company over the years leading up to closure, so that the final distribution is as small — and as tax-efficiently structured — as possible.
Company pension contributions are one of the most efficient tools for extracting retained profit before closure. A contribution in the final year (or the years preceding closure) reduces corporation tax, avoids NI, and moves value into a pension rather than into the company reserves that would need to be liquidated. Contributions must meet the commercial justification test and stay within the director's pension annual allowance, but for directors approaching retirement, pre-closure pension planning and closure planning often happen together.
Timing with tax years also matters. An MVL that straddles two tax years may allow the director to use CGT annual exemptions in both years, reducing the total CGT bill. If the retained profit is large enough to push total gains above the BADR lifetime limit (£1 million), planning the extraction in tranches across multiple tax years can reduce the effective rate on the excess. These decisions require professional advice but can significantly improve the total after-tax outcome.
BADR applies to MVL distributions from qualifying trading companies where the shareholder has owned at least 5% of shares, been a director or employee, and held the shares for at least two years. Investment companies and property holding companies do not typically qualify as trading companies for BADR purposes.
Where a company is struck off (dissolved) rather than liquidated via MVL, distributions up to £25,000 are treated as capital returns (potentially subject to BADR at 10%). Amounts above £25,000 are treated as income, subject to dividend tax rates of up to 39.35%. For larger retained profits, MVL is almost always more tax-efficient.
Typically £1,000–£3,000 in liquidator fees for a simple solvent company with modest assets. Complex cases with multiple shareholders, disputes or significant assets cost more. The cost is usually trivial relative to the tax saving when significant retained profits are involved.
Yes. Drawing down retained profits as salary before closure is an option, but salary is subject to income tax and NI — potentially at 40%+ effective rates. For most directors, MVL with BADR at 10% is more efficient than extracting retained profit as salary before closure.
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.