Dividend vs Salary Calculator 2025-26

For company directors who also own shares, the most tax-efficient extraction of profits typically involves a combination of salary and dividends. The optimal salary level is usually set at the NI Primary Threshold (£12,570 for 2025/26), which uses the full Personal Allowance, is deductible as a company expense (reducing Corporation Tax), and avoids employee NI contributions. Above this threshold, salary attracts both employee NI (8%) and employer NI (15%), making it expensive.

Dividends are paid from post-Corporation Tax profits, so the company has already paid 19–25% tax on the underlying profit. The first £500 of dividends is covered by the dividend allowance and is tax-free. Beyond that, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). Crucially, dividends carry no National Insurance for either the individual or the company, which is the primary source of tax savings compared with a pure salary approach.

The combined effective tax rate on profit extracted as salary (Corporation Tax saving offset by income tax plus double NI) is typically higher than the rate on dividends (Corporation Tax followed by dividend tax but no NI). However, salary counts as pensionable earnings for contribution purposes and builds state pension entitlement, while dividends do not. The calculation must also factor in the employer NI cost, which is an additional 15% charge the company bears on salary above the Secondary Threshold.