Dividend vs Salary Calculator 2026-27

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 2026/27), 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.

The director's classic question — salary or dividend? Limited company directors can pay themselves via PAYE salary AND/OR dividends from post-tax profits. Optimal mix balances: corporation tax (paid before dividends — 25% standard rate, 19% small profits rate under £50k); income tax on salary; National Insurance (employer and employee); dividend tax (after corporation tax) — making dividends 'double-taxed' but at lower effective rates.

UK dividend tax rates 2026/27. Personal Dividend Allowance: £500 (down from £2,000 in 2022/23, £1,000 in 2023/24). Above allowance: basic rate 8.75%; higher rate 33.75%; additional rate 39.35%. Dividends use up Basic Rate band AFTER salary. Sample: salary £12,570 (Personal Allowance) + dividends £37,700 = £50,270 total, all within basic rate band; dividend tax = 8.75% × (£37,700 − £500) = £3,255.

NI considerations — why low salary works. Employee Class 1 NI 2026/27: 8% above £12,570 (Primary Threshold). Employer Class 1 (secondary): 15% above £5,000 (Secondary Threshold, lowered April 2025). Employment Allowance £10,500/year reduces employer NI for eligible small employers (but NOT single-director companies since 2016). Optimal director salary 2026/27: £12,570 (Personal Allowance) — no income tax, employee NI from threshold, employer NI £1,135 (paid by company). Below £6,396 (Lower Earnings Limit): doesn't qualify for State Pension NI credit — usually best to pay above this.

Worked example — £100k profit company. Option A all-salary £100k: PAYE income tax £27,432, employee NI £4,820, employer NI £14,250 — net take £53,498. Option B £12,570 salary + £67k dividends (uses £87.5k pre-tax profit after CT): take-home £63,500+. Saving £10k/year via optimal mix. Note: from April 2024 employer NI is 15% from £5,000 — significantly worse than the £9,100 threshold pre-2025. Reduces dividend advantage somewhat but still wins for most directors.

Pension contributions — the third path. Employer pension contributions are 100% Corporation Tax deductible, no NI either side, count as 'business expense' not director income. Annual Allowance £60,000/year (since 2023/24) — directors can lump-sum significant amounts. Sample: instead of £67k dividend, take £40k dividend + £27k pension contribution = saves both employer NI (£4,000) and Corporation Tax (£6,750) AND defers income tax until pension drawdown. Lifetime tax saved: often £15-£25k for mid-career director.