If you own the company you work for, you decide how it pays you. A salary is a cost to the company, so it reduces corporation tax, but it carries employer National Insurance, employee National Insurance and income tax. A dividend is a share of what’s left after corporation tax: no National Insurance, but dividend tax on your personal return. The trick is that the two sets of rules interact, so the cheapest route is a mix, and the right mix moves with the numbers.
The 2026/27 figures that matter
| At the company | |
|---|---|
| Employer National Insurance | 15% of salary above £5,000 a year |
| Employment Allowance | Up to £10,500 of employer NI, but not for a company whose only employee above £5,000 is the director |
| Corporation tax | 19% on profits up to £50,000; 25% from £250,000; between the two, marginal relief makes each extra pound cost 26.5% |
| On your personal return | |
|---|---|
| Personal allowance | £12,570, tapering away above £100,000 of income |
| Income tax on salary | 20% up to £37,700 of taxable income, then 40%, then 45% above £125,140 |
| Employee National Insurance | 8% of salary between £12,570 and £50,270, then 2% |
| Dividend allowance | £500 at 0%, though it still uses up band space |
| Dividend tax | 10.75% in the basic rate band, 35.75% in the higher, 39.35% in the additional |
| State Pension qualifying year | A salary of at least the lower earnings limit, £6,708 for 2026/27, earns one without any NI actually being paid until £12,570 |
Dividends sit on top of your other income, so a salary that uses up the personal allowance pushes every dividend into a taxed band.
A worked example
£60,000 profit before the director's pay · one director, no other income, no Employment Allowance · England, 2026/27 · rounded to the pound
| Salary £12,570 | Salary £6,708 | Salary £5,000 | All salary | |
|---|---|---|---|---|
| Salary paid | £12,570 | £6,708 | £5,000 | £52,826 |
| Employer NI | £1,136 | £256 | £0 | £7,174 |
| Profit left for corporation tax | £46,295 | £53,036 | £55,000 | £0 |
| Corporation tax | £8,796 | £10,304 | £10,825 | £0 |
| Dividends paid | £37,499 | £42,731 | £44,175 | £0 |
| Income tax on salary | £0 | £0 | £0 | £8,562 |
| Employee NI | £0 | £0 | £0 | £3,067 |
| Dividend tax | £3,977 | £3,910 | £3,881 | £0 |
| Take-home | £46,091 | £45,530 | £45,294 | £41,197 |
| Total tax and NI | £13,909 | £14,470 | £14,706 | £18,803 |
| State Pension year? | Yes | Yes | No | Yes |
Three things stand out.
The £12,570 salary wins, by about £560 over the lower-earnings-limit salary and £800 over the £5,000 one. The extra salary costs employer NI at 15%, but it comes out of profit before corporation tax, and, at this level of profit, it keeps the company’s taxable profit under £50,000. The lower salaries push it over, where marginal relief means each extra pound of profit is taxed at 26.5%, not 19%.
All-salary is the expensive route. Paying everything as salary costs £18,803 in tax and NI against £13,909 for the best mix: nearly £4,900 a year. (The company can’t actually pay a £60,000 salary from £60,000 of profit, because employer NI comes on top; £52,826 plus £7,174 of NI is what £60,000 buys.)
The £5,000 salary is a trap. It avoids National Insurance altogether, which is why it’s often quoted, but it doesn’t reach the £6,708 lower earnings limit, so the year doesn’t count towards the State Pension, and it still loses on tax.
When the answer changes
The example is deliberately plain. The best mix moves when any of these apply:
- Higher profits. Once dividends pass the basic rate band the 35.75% rate bites, and leaving profit in the company, or paying it into a pension, starts to compete.
- A second employee paid above £5,000 unlocks the Employment Allowance, making a bigger salary cheaper.
- Other income, such as a second job or rental income, uses up the personal allowance and bands before the company pay does.
- Income near £100,000, where the personal allowance tapers away and the effective rate on the slice above it is 60%.
- Employer pension contributions, which are deductible for corporation tax and not taxed on the director at all, within the annual allowance.
- Student loans: repayments are taken on salary through payroll; dividends can count too, through Self Assessment, once unearned income is over £2,000 (see gov.uk, Repaying your student loan). The calculator treats that as a rule of thumb.
- Scottish taxpayers pay Scottish rates on salary, but dividends use UK rates and bands everywhere.
What the calculator does
The Director Salary vs Dividend Calculator runs the four strategies above plus any custom salary, for either 2025/26 or 2026/27, with your own profit, other income, pension contribution, Employment Allowance status and student loan plan. It names the best take-home, shows every step of the working, warns about the pension year and the £100,000 taper, and re-runs the whole model across a range of profits so you can see where the answer flips. Every rate sits on the Settings tab with its gov.uk source.
Then take it to your accountant. Dividend timing, pension planning and what your company can afford to distribute are decisions, not sums.
Questions people ask
Why not pay a salary of £5,000 and take everything else as dividends?
£5,000 is where employer National Insurance starts, so it avoids NI entirely. But it is below the lower earnings limit of £6,708 for 2026/27, so it doesn't earn a State Pension qualifying year, and it leaves more profit in the company to be taxed at 19% or, above £50,000, at 26.5% at the margin. In the example below it comes out about £800 a year worse than a £12,570 salary.
What changed in April 2026?
Dividend tax rates rose by two percentage points: 10.75% in the basic rate band and 35.75% in the higher rate band, with the additional rate unchanged at 39.35%. The £500 dividend allowance, the 15% employer NI rate above £5,000 and the corporation tax rates did not change.
Can the company claim the Employment Allowance?
Not if the director is the only employee paid above £5,000 a year. With at least one other such employee it can, and up to £10,500 of employer NI is wiped out, which makes a higher salary cheaper. The calculator has a yes/no setting for it.
Do dividends need paperwork?
Yes. Dividends can only be paid from profits after corporation tax; in practice, minute each one and issue a dividend voucher. Paying more than the company has in distributable profit is an illegal dividend that HMRC can treat as a loan or salary.
Sources
- gov.uk: Tax on dividends (rates from 6 April 2026). Checked 29 September 2026.
- gov.uk: Rates and thresholds for employers 2026 to 2027 (secondary threshold £5,000, employer rate 15%, lower earnings limit £129 a week).
- gov.uk: Corporation Tax rates and reliefs; Marginal Relief for Corporation Tax.
- gov.uk: Income Tax rates and Personal Allowances.
This is general information, not tax advice. Figures are as published on gov.uk on the date shown and can change. Check them, or ask an accountant, before you rely on them.