Dividend vs Salary Calculator 2026-27

For a director who also owns the shares, the cheapest way to take profit out of a company is usually a mix of salary and dividends. The optimal salary is normally set at the NI Primary Threshold of £12,570 for 2026/27. That figure uses the full Personal Allowance, counts as a deductible company expense which reduces Corporation Tax, and stops short of employee National Insurance. Pay more than that as salary and it gets expensive quickly, because employee NI at 8% and employer NI at 15% both bite on the excess.

Dividends come out of post-Corporation Tax profit, so the company has already paid 19 to 25% on the money before you see it. The first £500 falls inside the dividend allowance and is tax-free. Above that, dividends are taxed at 10.75% at the basic rate, 35.75% at the higher rate and 39.35% at the additional rate. What makes the difference is National Insurance, or rather its absence, since dividends carry none for the individual or the company, and that is the whole source of the saving against a pure salary.

Put the two together and the effective rate on profit taken as salary, where a Corporation Tax saving is offset by income tax plus NI twice over, comes out higher than the rate on profit taken as dividends, where Corporation Tax is followed by dividend tax and nothing else. Salary has its own merits. It counts as pensionable earnings and builds State Pension entitlement, while dividends do neither. Employer NI at 15% above the Secondary Threshold is a company cost that belongs in the calculation as well.

Corporation Tax is charged at 25% as the standard rate, with a 19% small profits rate under £50k, and it is paid before dividends can be declared. Dividends then stack on top of salary and use up whatever remains of the basic rate band. Take a salary of £12,570 with £37,700 of dividends: the total of £50,270 sits entirely within the basic rate band, so the dividend tax is 10.75% of £37,700 less the £500 allowance, which comes to £3,999 and leaves £46,271 in hand.

The National Insurance detail is what makes a low salary work. Employee Class 1 NI is 8% on earnings above the £12,570 Primary Threshold. Employer Class 1 is 15% above a Secondary Threshold of £5,000, lowered from £9,100 in April 2025, so a director on £12,570 generates about £1,135 of employer NI for the company to pay. The Employment Allowance of £10,500 a year would normally absorb that, but single-director companies have been excluded since 2016. Paying below the Lower Earnings Limit of £6,708 is a false economy, since the year then fails to earn a State Pension credit. The dividend allowance has shrunk from £2,000 in 2022/23 to £1,000 in 2023/24 and £500 now.

A worked comparison on a company with £100k of profit shows the size of the gap. Paying all of it out as salary, the company can afford a gross salary of £87,608.70, because employer NI of £12,391.30 is due on the part above £5,000. PAYE income tax of £22,475.48 and employee NI of £3,762.77 then leave £61,370.44 net. Taking £12,570 as salary instead costs £1,135.50 of employer NI and leaves £86,294.50 of taxable profit; Corporation Tax of £19,118.04, with marginal relief, leaves £67,176.46 to pay as dividends, and dividend tax of £14,536.83 leaves £65,209.62 in hand. The saving of about £3,840 a year is why directors bother with the split. It is smaller than it used to be because Corporation Tax and dividend tax rates have both gone up.

Pension contributions are the third route and often the best one. An employer contribution is fully deductible against Corporation Tax, carries no National Insurance on either side, and counts as a business expense rather than director income. The Annual Allowance has been £60,000 a year since 2023/24, which lets a director move a meaningful sum at once. Dividends carry no National Insurance, so paying a contribution instead of a dividend saves Corporation Tax and dividend tax rather than NI; an employer NI saving arises only when a contribution replaces salary. On the £100k example, paying £27,000 into the pension instead of drawing it out cuts Corporation Tax by £7,155 and dividend tax by about £7,095, so take-home cash falls by only about £12,750 while £27,000 goes into the pension. Income tax is deferred until the pension is drawn.