At some point most contracting companies reach the end of their useful life. You might be taking a permanent role, retiring, or moving abroad. Whatever the reason, the company often holds a meaningful cash balance — accumulated profits that have already suffered corporation tax but haven't yet been drawn out. The question is how to extract that final balance, and the answer hinges on one distinction: is the money taxed as income (a dividend) or as a capital gain?
This guide walks through the two main closure routes, the rule that decides which one is open to you, the relief that makes capital treatment so attractive, and the anti-avoidance rule that can undo the whole plan if you're not careful.
The two ways to close a solvent company
A company with no debts it can't pay (a solvent company) can be closed in one of two ways:
- Striking off — a voluntary dissolution. You file form DS01 with Companies House, the company is removed from the register, and it ceases to exist. It's cheap (the Companies House fee is modest) and you can do it yourself.
- Members' Voluntary Liquidation (MVL) — a formal liquidation run by a licensed insolvency practitioner. The liquidator realises the assets, settles any liabilities, and distributes the surplus to shareholders before dissolving the company. It costs more — typically a few thousand pounds in fees — but it changes how the distribution is taxed.
Both routes above are for companies that can pay everything they owe. If your company can't settle its debts, that's an insolvent liquidation (a Creditors' Voluntary Liquidation or compulsory liquidation) — a completely different process with different duties on the directors. This guide doesn't cover insolvency; take specialist advice immediately if your company is in that position.
The £25,000 rule: when a strike-off gets capital treatment
The reason this decision matters is a single threshold. When you strike a company off, any reserves distributed to shareholders in the run-up are treated as capital — but only up to a total of £25,000. Distribute £25,000 or less in total, and it's a capital gain (taxed at capital gains rates, potentially with Business Asset Disposal Relief). Distribute even £1 more, and the entire amount — not just the excess — is taxed as an income distribution, i.e. a dividend.
This trips people up constantly. The £25,000 isn't a tax-free band with the excess taxed differently — it's a threshold that, once crossed, recharacterises everything. Distribute £24,000 on a strike-off and it's all capital. Distribute £30,000 and all £30,000 is a dividend. If your reserves are comfortably under £25,000, a strike-off is simple and efficient. If they're well over, you almost certainly want an MVL instead.
Why an MVL changes the maths: capital, not income
In a Members' Voluntary Liquidation there is no £25,000 limit. Every distribution the liquidator makes to shareholders is a capital distribution, however large. That opens the door to capital gains tax treatment — and, crucially, to Business Asset Disposal Relief.
For a contractor sitting on, say, £150,000 of retained profit, the difference between dividend rates (up to 39.35%) and a BADR-relieved capital gain is enormous. That's why, above the £25,000 threshold, the few thousand pounds of liquidator's fees are usually money very well spent.
Business Asset Disposal Relief (BADR)
BADR — the relief formerly known as Entrepreneurs' Relief — reduces the capital gains tax rate on qualifying business disposals. The rate has risen sharply in recent years: it was 10% up to 5 April 2025, 14% for 2025/26, and 18% from 6 April 2026. It applies to qualifying gains up to a lifetime limit of £1 million.
To qualify when winding up your company you generally need to meet these conditions:
Do you qualify for BADR on a winding-up?
Was it a trading company? The company must have been carrying on a genuine trade (not, for example, just holding investments). A typical contracting company qualifies.
Did you hold at least 5%? You must have held at least 5% of the ordinary share capital and voting rights — straightforward for a sole director-shareholder.
Were you an officer or employee, for at least two years? You must have been a director, company secretary or employee of the company (or one in the same group), and have met the 5% test, throughout the two years ending on the date of disposal. A company wound up shortly after incorporation will not qualify, and neither will a shareholder who resigned as a director well before the winding-up.
For at least two years? The qualifying conditions must have been met throughout the two years ending with the date the trade ceased.
Distributed within three years? The capital distribution from the winding-up should be made within three years of the trade ending to fall within the relief.
Worked example: strike-off vs MVL on £150,000
A contractor closes a company holding £150,000 of post-corporation-tax reserves. (Figures are illustrative and ignore the annual CGT exemption and any other income for simplicity.)
| Route | Tax treatment | Approx. tax | Net to shareholder |
|---|---|---|---|
| Strike-off | £150,000 taxed as a dividend (over £25,000, so all of it is income) taxed across the dividend bands | ~£45,000 | ~£105,000 |
| MVL with BADR (18%) | £150,000 as a capital gain, BADR rate 18%, less ~£2,500 liquidator fees | ~£27,000 + fees | ~£120,500 |
Even after the liquidator's fees, the MVL leaves the contractor roughly £15,500 better off on this balance. The larger the reserves, the wider the gap — which is exactly why the £25,000 threshold is the decision point.
If your distributable reserves are comfortably below £25,000, strike the company off — capital treatment applies automatically and you avoid liquidator fees. If your reserves are well above £25,000 and you qualify for BADR, an MVL almost always wins despite the fees. The grey zone is reserves only slightly above £25,000, where the fees can eat the benefit — that's where it pays to run the numbers carefully.
The TAAR: the anti-"phoenixing" rule that can undo it all
HMRC introduced a Targeted Anti-Avoidance Rule (TAAR) to stop people liquidating a company for capital treatment, pocketing the cash at low CGT rates, and then carrying on essentially the same trade through a new company — so-called "phoenixing." If the TAAR applies, the capital distribution from your liquidation is taxed as a dividend instead, wiping out the entire benefit of the MVL.
The TAAR can apply where all four of these conditions are met:
- Condition A: you held at least 5% of the company immediately before the winding-up.
- Condition B: the company was a close company (most contractor companies are).
- Condition C: within two years of the distribution, you carry on the same or a similar trade or activity — whether through a new company, as a sole trader, or via a connected party.
- Condition D: it's reasonable to assume the main purpose (or one of the main purposes) of the winding-up was to gain a tax advantage.
This is the single biggest risk when closing a contracting company for capital treatment. If you liquidate, take the cash at BADR rates, and then go back to contracting through a new limited company within two years, HMRC can apply the TAAR and tax the whole distribution as a dividend retrospectively. Genuine career changes — going permanent, retiring, moving into an unrelated field — are fine. Closing and reopening to wash out profits is exactly what the rule targets. If there's any chance you'll return to similar self-employed work soon, take advice before liquidating.
The practical steps and timeline
Whichever route you take, a clean closure follows a similar sequence:
- Cease trading and settle obligations — collect outstanding invoices, pay suppliers, and finalise outstanding contracts.
- Submit final filings — a final set of accounts and a final corporation tax return covering the period to cessation, and settle the final corporation tax.
- Deregister for VAT and close the PAYE scheme — submit final VAT and payroll returns.
- Deal with the cash — for a strike-off, distribute reserves (staying within £25,000) before applying; for an MVL, the liquidator handles distributions once appointed.
- Apply to close — file DS01 for a strike-off (the company is usually dissolved around two months later), or appoint a liquidator to run the MVL (typically a few months end to end).
A little forward planning over the final year or two — for example, managing reserves so they either sit cleanly under £25,000 or justify an MVL — can make a substantial difference to the tax you ultimately pay on closure.
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