There are several reasons a contractor might decide to close their limited company: moving to permanent employment, retiring, emigrating, or simply deciding that contracting is no longer the right path. Understanding the options and tax implications helps you make the most efficient exit.
Option 1: Striking off (dissolution)
Striking off is the simplest and cheapest way to close a company. You apply to Companies House using form DS01, and after a two-month notice period during which no objections are raised, the company is dissolved. Before applying, you must ensure the company has no outstanding debts, has filed all accounts and returns, and has distributed any remaining assets. The filing fee is £10 online.
When to use striking off
Striking off is suitable when your company has retained profits of less than £25,000 to distribute. Distributions up to this amount can be treated as capital rather than income, qualifying for Capital Gains Tax rates (which are lower than dividend tax rates) and potentially Business Asset Disposal Relief, reducing the effective tax rate to 10 percent.
Option 2: Members Voluntary Liquidation (MVL)
An MVL is a formal liquidation process handled by a licensed insolvency practitioner. It is more expensive (typically £1,500–£3,000 in professional fees) but allows you to extract retained profits above £25,000 as a capital distribution, potentially qualifying for Business Asset Disposal Relief. The lifetime allowance for this relief is £1 million.
When to use an MVL
An MVL makes financial sense when retained profits exceed £25,000 and the tax saving from capital treatment versus dividend treatment outweighs the professional fees. For a company with £50,000 or more in retained profits, the tax saving can be substantial. Your accountant can model the exact figures for your situation.
Keep it dormant instead
If you are uncertain about your future plans, keeping the company dormant is a low-cost alternative. Dormant companies still need to file annual accounts and a confirmation statement with Companies House, but the costs are minimal. If you decide to return to contracting later, you can simply reactivate the company rather than incorporating a new one.