You've decided to wind down your contractor company. Maybe you're going permanent, retiring, or moving inside IR35 so the limited company no longer earns its keep. The big question now is how to get the cash out without handing more than you need to HMRC.
There are two main routes for a solvent company: a voluntary strike-off, or a Members' Voluntary Liquidation (MVL). The right one depends almost entirely on how much money is left in the company.
This guide is for UK contractors and small company directors who want a plain-English comparison, the rule that decides which route is cheaper, and an illustrative worked example so you can see the maths. We'll keep it accurate and current, and flag where rates are changing.
What does "closing a limited company tax-efficiently" actually mean? {#what-does-closing-tax-efficiently-mean}
When you close a solvent company, the cash and assets left over after paying the final Corporation Tax bill, any outstanding creditors and the accountant get distributed to you, the shareholder.
The tax-efficiency question is simple. Is that final distribution treated as capital (taxed under Capital Gains Tax, often at a relieved rate) or as income (taxed like a dividend)?
Capital treatment is usually far cheaper, especially if you qualify for Business Asset Disposal Relief (BADR). Income treatment can mean dividend tax at up to 39.35% for 2025/26. So the whole game is making sure your final payout lands on the capital side of the line, and doing it through the right legal route.
Two things drive that outcome: the closure method you pick, and how much money is being distributed.
What is a voluntary strike-off? {#what-is-a-voluntary-strike-off}
A voluntary strike-off (also called dissolution) is the cheapest and simplest way to close a company. You apply to Companies House on form DS01 to have the company removed from the register. The fee is £18, and it can't be paid from the company's own bank account.
Your company can only apply to be struck off if, in the last 3 months, it:
- has not traded or sold off any stock,
- has not changed its name,
- is not threatened with liquidation, and
- has no agreements with creditors, such as a Company Voluntary Arrangement (CVA).
The form must be signed by a majority of the directors.
Crucially, you must deal with the company's assets before you apply. That means extracting the cash, closing the bank account and transferring anything like domain names. Anything left in the company when it's dissolved passes to the Crown as "bona vacantia", so an empty bank account is the goal.
In practice, the mistake we most often see is a director leaving the final balance sitting in the company account after dissolution. Recovering it is slow and painful, so empty the account first.
What is a Members' Voluntary Liquidation (MVL)? {#what-is-an-mvl}
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An MVL is a formal liquidation for a solvent company, meaning one that can pay all its debts. It's a bigger process. You appoint a licensed insolvency practitioner (IP) as liquidator, the directors make a statutory declaration of solvency, and at least 75% of shareholders (by value) must agree.
The liquidator then settles any remaining liabilities, agrees the final tax position and distributes what's left to shareholders as a capital distribution.
An MVL costs more than a strike-off. You're paying an IP for a regulated process, so fees typically run into the low thousands of pounds plus disbursements. The pay-off is certainty: the entire distribution is treated as capital, with no £25,000 ceiling.
Why does the £25,000 rule decide everything? {#why-does-the-25000-rule-decide-everything}
This is the single most important rule for contractors closing a company by strike-off.
When you distribute cash in anticipation of striking the company off, that distribution is only treated as capital if the total of all such distributions does not exceed £25,000. This sits in section 1030A of the Corporation Tax Act 2010.
If the total comes to even £1 over £25,000, the whole amount is treated as an income distribution (a dividend), not just the excess. That can be an expensive cliff edge.
A couple of conditions sit alongside the £25,000 limit. The company must have collected, or intend to collect, debts owed to it, and paid, or intend to pay, debts it owes. And the company needs to actually be dissolved within two years of the distribution, or normal (income) distribution treatment applies.
So the £25,000 rule sorts contractors into two camps:
- £25,000 or less to distribute? Strike-off gives you capital treatment cheaply.
- More than £25,000? Strike-off would tip the whole lot into dividend tax. An MVL keeps it all as capital. That's the reason the MVL fee is usually worth paying.
How is the cash taxed when you close the company? {#how-is-the-cash-taxed}
Once a distribution qualifies as capital, it's a chargeable gain for Capital Gains Tax (CGT). Your gain is broadly the cash you receive less the cost of your shares (often just the £1 or £100 you originally subscribed).
A few figures matter here, all for 2025/26.
- The CGT annual exempt amount is £3,000, so the first £3,000 of gains is tax-free.
- Standard CGT rates on other assets are 18% within your basic rate band and 24% above it.
- If you qualify for Business Asset Disposal Relief, the rate is 14% for 2025/26, rising to 18% for 2026/27.
BADR has a £1 million lifetime limit on qualifying gains. To qualify on a company wind-up, broadly you need to have been an officer or employee holding at least 5% of the ordinary shares and voting rights for at least the two years before the business ceased, and the distribution must usually be made within three years of cessation. Most owner-managed contractor companies meet this, but it's worth confirming your specific facts with an accountant.
By contrast, if the payout is treated as income, it's taxed as a dividend: 8.75% in the basic rate band, 33.75% in the higher rate band and 39.35% in the additional rate band for 2025/26, after the £500 dividend allowance. For a higher-rate contractor, that's the difference between a 14% bill and a 33.75% one.
MVL vs strike-off: a side-by-side comparison {#mvl-vs-strike-off-comparison}
| Feature | Voluntary strike-off | Members' Voluntary Liquidation (MVL) |
|---|---|---|
| Best for | Reserves of £25,000 or less | Reserves above £25,000 |
| Tax treatment of distribution | Capital, but only if total distributions do not exceed £25,000 | Capital, with no £25,000 cap |
| Need a licensed insolvency practitioner? | No | Yes (liquidator) |
| Headline cost | £18 Companies House fee | Typically low thousands of pounds plus disbursements |
| Speed | Dissolved roughly 2-3 months after a clear application | Longer; a formal regulated process |
| BADR available? | Yes, if you qualify | Yes, if you qualify |
| Main risk | Going £1 over £25,000 makes the whole payout a dividend | Higher upfront cost; more paperwork |
Cost figures other than the £18 Companies House fee are general market indications, not Zmartly quotes, and IP fees vary. Always get a written quote.
Illustrative example: a contractor with £120,000 to extract {#illustrative-example}
Illustrative example. Ravi is a higher-rate-taxpaying contractor closing his solvent company. After the final Corporation Tax bill and fees, the company has £120,000 of reserves to distribute. He has held all the ordinary shares for six years and qualifies for BADR. His shares originally cost £100. Figures are 2025/26.
Option A: strike-off. Because £120,000 is well over £25,000, section 1030A does not apply. The whole £120,000 is treated as an income distribution (a dividend).
- Dividend allowance: £500 tax-free.
- Assume Ravi has already used his basic rate band on other income, so the dividend falls in the higher rate band at 33.75%.
- Taxable dividend: £120,000 - £500 = £119,500.
- Dividend tax: £119,500 x 33.75% = £40,331.25.
Option B: MVL. The full £120,000 is a capital distribution. The gain is £120,000 - £100 = £119,900.
- CGT annual exempt amount: £3,000.
- Taxable gain: £119,900 - £3,000 = £116,900.
- BADR rate for 2025/26: 14%.
- CGT: £116,900 x 14% = £16,366.
The MVL route saves roughly £23,965 in tax here (£40,331 minus £16,366), before deducting the IP's fee. Even after a liquidator's fee of a few thousand pounds, Ravi is clearly better off with the MVL.
The lesson: the more reserves you have, the more the MVL's capital treatment is worth, and the easier it is to justify the extra cost. For a contractor with only £20,000 left in the company, the opposite is true, and a simple strike-off wins.
How do you decide which route is right? {#how-do-you-decide}
A clean decision path for most contractors:
- Confirm the company is solvent. It can pay all its debts. If it can't, neither of these routes applies and you need different advice.
- Work out the reserves to distribute. After the final Corporation Tax bill, creditors and fees.
- Apply the £25,000 test. £25,000 or less of total distributions points to strike-off. More than that points to MVL.
- Check BADR eligibility. The 5% holding, the two-year ownership condition and the timing rules. This is where the tax saving lives, so get it confirmed.
- Compare cost against tax saved. As the example shows, an MVL's fee is usually small next to the tax saved once reserves climb well above £25,000.
- Mind the timing. BADR's rate is 14% for 2025/26 and 18% for 2026/27, so the tax year your distribution falls into matters. Plan the timing deliberately.
If you want help modelling the numbers, our capital gains tax calculator is a quick way to sense-check a capital distribution.
Want it done properly? Zmartly works with contractors every day on tax-efficient company closures. Book a free 20-minute call and we'll tell you which route saves you the most, and handle the corporation tax and final returns for you: talk to a Zmartly accountant.
We also support contractors and those navigating IR35 through the whole transition, not just the closure.
Frequently asked questions {#faqs}
Is it cheaper to strike off or liquidate a contractor company?
A strike-off is far cheaper to run, with an £18 Companies House fee. But "cheaper" only counts the process, not the tax. If your reserves are above £25,000, a strike-off forces the whole distribution to be taxed as a dividend, which usually costs more in tax than an MVL's fee. Below £25,000, strike-off normally wins.
What is the £25,000 limit when closing a company?
Under section 1030A of the Corporation Tax Act 2010, distributions made in anticipation of striking a company off are treated as capital only if the total does not exceed £25,000. Go a single pound over and the entire distribution is taxed as income (a dividend), not just the excess.
Can I get Business Asset Disposal Relief when I close my company?
Often yes. Broadly you must have been an officer or employee holding at least 5% of the ordinary shares and voting rights for at least two years before the business ceased, and the distribution should usually be made within three years of cessation. BADR is taxed at 14% for 2025/26 and 18% for 2026/27, with a £1 million lifetime limit. Confirm your facts with an accountant.
How long does it take to close a limited company?
A clean strike-off is usually finalised around two to three months after Companies House accepts the application, provided no one objects. An MVL is a formal regulated process run by a liquidator and generally takes longer, though the bulk of the cash can often be distributed early.
Do I need an accountant to close my company?
You don't legally need one for a strike-off, but a final set of accounts and a correct final Corporation Tax computation matter, and the £25,000 test and BADR rules are easy to get wrong. For an MVL you must appoint a licensed insolvency practitioner as liquidator. An accountant helps you choose the cheaper route and get the tax treatment right.
