Director Salary vs Dividends Calculator (UK)
Running a limited company gives you flexibility in how you extract profits – typically through a combination of salary and dividends. Each has different tax implications.
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For 2026/27, two significant changes affect the optimal director salary and dividend split. Employer NI has risen to 15% with the secondary threshold dropping to £5,000, making salary more expensive. At the same time, dividend tax rates increased by 2 percentage points (basic rate now 10.75%, higher rate 35.75%), narrowing the gap between salary and dividends.
Many director-shareholders pay themselves entirely in dividends to minimise National Insurance, but this overlooks important considerations. Taking no salary means no National Insurance credits towards your state pension. The optimal director salary for 2026/27 depends on your specific circumstances — the lower employer NI threshold means the traditional advice of taking salary up to £12,570 now carries a higher employer NI cost.
Finding the right salary vs dividends split minimises your combined tax bill while protecting pension entitlements. Enter your company profit and desired extraction below to compare different combinations.
Income Details
Total profit available before salary and dividends
Common choices: £12,570 (PA) or £9,100 (NI threshold)
Amount you wish to take as dividends
Employment income, rental income, etc.
Tax Breakdown
Company Level
Personal Level
Total Personal Tax
Income tax + NI + dividends
Net Take-Home Pay
Salary + dividends - tax
Effective Tax Rate
All taxes combined
Dividend Allowance Used
• Tax-free dividends: £500
• Taxable dividends: £36,999
What this means for your extraction strategy
For 2026/27, the sweet spot has shifted. With employer NI at 15% and the secondary threshold dropping to £5,000, paying yourself a salary all the way to the Personal Allowance now triggers a meaningful employer NI bill. Many directors will be better off taking a smaller salary (around the Lower Earnings Limit, ~£6,500) just to bank the State Pension qualifying year, then taking the rest as dividends.
Dividend tax went up by 2 percentage points in April 2026 (basic 10.75%, higher 35.75%, additional 40.6%), so the gap vs salary is narrower than it used to be — but Corporation Tax + dividends usually still beats salary at higher profit levels. Always model the full bill (CT + employer NI + dividend tax) rather than each tax in isolation.
How Salary Is Taxed
Understanding the tax treatment of director salaries
Salary paid to directors is treated like any other employment income. It attracts both Income Tax and National Insurance contributions:
Income Tax on Salary
- • First £12,570 is tax-free (Personal Allowance)
- • 20% on earnings from £12,571 to £50,270
- • 40% on earnings from £50,271 to £125,140
- • 45% on earnings above £125,140
National Insurance
- • Employee NI: 8% between £12,570 and £50,270
- • Employee NI: 2% above £50,270
- • Employer NI: 13.8% above £9,100 (15% from April 2025)
- • Employer NI is an additional company cost
The key advantage of salary is that it is a tax-deductible expense for the company, reducing Corporation Tax. However, the combined burden of Income Tax and National Insurance (both employee and employer) can make higher salaries less efficient than dividends.
How Dividends Are Taxed
The tax treatment of dividend income
Dividends are paid from company profits after Corporation Tax has been deducted. They are then taxed in your hands at special dividend tax rates:
There is also a £500 dividend allowance (2026/27), meaning the first £500 of dividends each year are tax-free regardless of your tax band. Dividends do not attract National Insurance, which is why they are often more tax-efficient than salary for amounts above the Personal Allowance.
Common Salary + Dividend Strategies
Popular approaches used by director-shareholders
Strategy 1: Personal Allowance Salary
Salary: £12,570 per year
Dividends: Remainder of desired income
This uses the full Personal Allowance, so no Income Tax on salary. Some Employer NI applies (on amount above £9,100). Commonly used when building state pension entitlement is important.
Strategy 2: NI Threshold Salary
Salary: £9,100 per year
Dividends: Remainder of desired income
No Employer NI at all. Still qualifies for state pension. Remaining Personal Allowance can absorb some dividends tax-free. Often the most tax-efficient for smaller companies.
Strategy 3: Higher Salary
Salary: £50,270 (basic rate limit)
Dividends: Top-up as needed
Maximises Corporation Tax relief and may be required for mortgage applications. Less tax-efficient overall but provides documented employment income.
Strategy 4: Spouse Dividends
Approach: Split dividends with spouse
Requirement: Spouse must own shares
If your spouse has unused Personal Allowance or is a basic rate taxpayer, they can receive dividends at lower tax rates. Requires genuine share ownership.
The optimal strategy depends on your total income, other earnings, pension contributions, and personal circumstances. Many directors find that a combination of low salary plus dividends provides the most tax-efficient extraction of company profits.
Worked Example: £60,000 Profit
Comparing two approaches to extracting £50,000 from a company with £60,000 profit:
| Low Salary | High Salary | |
|---|---|---|
| Salary | £12,570 | £50,000 |
| Dividends | £37,430 | £0 |
| Employer NI | £479 | £5,644 |
| Corporation Tax | £8,950 | £828 |
| Income Tax | £0 | £7,486 |
| Employee NI | £0 | £3,014 |
| Dividend Tax | £3,231 | £0 |
| Net Take-Home | £46,769 | £39,500 |
| Tax Saving | £7,269 | - |
This example illustrates why the low salary plus dividends approach is often favoured for tax efficiency. However, individual circumstances vary, and factors like mortgage requirements or pension contributions may influence the optimal strategy.
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