Every salary-and-dividend calculator is doing the same three sums. Corporation Tax on what is left after salary, personal tax and National Insurance on the salary, then dividend tax on the distribution. If you understand what each lever does, you can sanity-check any calculator’s answer — and spot the ones still running 2025/26 dividend rates.
Because dividend rates rose on 6 April 2026, a lot of them are.
The two levers behave completely differently
This is the whole basis of the optimisation, and it is worth being precise about it.
Salary is a company expense. It reduces taxable profit, so it reduces Corporation Tax. Employer National Insurance on it is also deductible. It builds your National Insurance record. It attracts PAYE, employee National Insurance and employer National Insurance.
Dividends are not an expense. They are a distribution of profit that has already been taxed at the company level. They do not reduce Corporation Tax. They attract no National Insurance at all, at either end, and are taxed at lower personal rates than salary.
So salary buys you a Corporation Tax deduction at the price of National Insurance. Dividends avoid National Insurance at the price of having no deduction. The optimum is wherever those two trade-offs cross.
The 2026/27 numbers
| Item | 2026/27 |
|---|---|
| Personal Allowance | £12,570 |
| Basic rate band | £12,570 to £50,270 |
| Income tax on salary | 20% / 40% / 45% |
| Employee National Insurance | 8% from £12,570 to £50,270, then 2% |
| Employer National Insurance | 15% above the £5,000 secondary threshold |
| Employment Allowance | £10,500 — not available where the director is the only employee paid above the secondary threshold |
| Dividend allowance | £500 |
| Dividend rates | 10.75% / 35.75% / 39.35% |
| Corporation Tax | 19% to £50,000, effectively 26.5% from £50,000 to £250,000, 25% above |
The dividend rates are the ones to check. Basic and higher rates rose two points on 6 April 2026; the additional rate is unchanged at 39.35%.
What £1 of company profit is actually worth
Strip everything else away and this is the calculation. For each route, how much of £1 of pre-tax company profit reaches the director’s bank account? Assumes 19% Corporation Tax and no Employment Allowance.
| Route for £1 of pre-tax profit | Net to the director |
|---|---|
| Salary up to £5,000, within the Personal Allowance | 100.0p |
| Salary from £5,000 to £12,570, within the Personal Allowance | 87.0p |
| Dividend covered by unused Personal Allowance or the £500 allowance | 81.0p |
| Dividend taxed at 10.75% | 72.3p |
| Salary taxed at 20% plus 8% employee NIC | 62.6p |
| Dividend taxed at 35.75% | 52.0p |
| Salary taxed at 40% plus 2% employee NIC | 50.4p |
Two things fall out of that table.
Salary still wins up to the Personal Allowance, even with employer National Insurance at 15% and no Employment Allowance. 87.0p beats 81.0p. The Corporation Tax deduction on the salary and the employer NIC more than covers the NIC cost while there is no income tax and no employee NIC to pay.
Above the Personal Allowance, dividends win — 72.3p against 62.6p at basic rate. That gap is why the salary-plus-dividend structure exists.
The rest of this article uses a £12,570 salary as the working assumption for a single-director company, which is where those two facts point. The full optimal-salary analysis, including the £5,000 and Lower Earnings Limit alternatives, sits in its own article.
Worked example 1: £30,000 of profit
Profit before the director’s own pay, single director and shareholder, no other income, no Employment Allowance.
| Step | Amount |
|---|---|
| Profit before director’s pay | £30,000.00 |
| Salary | £12,570.00 |
| Employer NIC — 15% × (£12,570 − £5,000) | £1,135.50 |
| Profit after salary and employer NIC | £16,294.50 |
| Corporation Tax at 19% | £3,095.96 |
| Available to distribute | £13,198.54 |
| Dividend allowance at 0% | £500.00 |
| Taxed at 10.75% — £12,698.54 | £1,365.09 |
Income tax on the salary is nil and employee National Insurance is nil, because £12,570 is exactly the Personal Allowance and the primary threshold.
Total tax: £5,596.55. Net in hand: £24,403.45. An effective rate of 18.66%.
Paying the whole £30,000 as salary instead gives a gross salary of £26,739.13 with £3,260.87 of employer NIC. Income tax £2,833.83, employee NIC £1,133.53, total tax £7,228.23. The split saves £1,631.68.
Worked example 2: £60,000 of profit
| Step | Amount |
|---|---|
| Profit before director’s pay | £60,000.00 |
| Salary | £12,570.00 |
| Employer NIC | £1,135.50 |
| Profit after salary and employer NIC | £46,294.50 |
| Corporation Tax at 19% | £8,795.96 |
| Available to distribute | £37,498.54 |
| Dividend allowance at 0% | £500.00 |
| Taxed at 10.75% — £36,998.54 | £3,977.34 |
Total income is £50,068.54, so the dividend still sits entirely inside the basic rate band. The £500 allowance uses £500 of the band, leaving £37,200 of basic-rate room.
Total tax: £13,908.80. Net in hand: £46,091.20. Effective rate 23.18%.
All salary: gross £52,826.09, employer NIC £7,173.91, income tax £8,562.44, employee NIC £3,067.12 — total £18,803.47. The split saves £4,894.67.
Worked example 3: £100,000 of profit
| Step | Amount |
|---|---|
| Profit before director’s pay | £100,000.00 |
| Salary | £12,570.00 |
| Employer NIC | £1,135.50 |
| Profit after salary and employer NIC | £86,294.50 |
| Corporation Tax with Marginal Relief | £19,118.04 |
| Available to distribute | £67,176.46 |
| Dividend allowance at 0% | £500.00 |
| £37,200 taxed at 10.75% | £3,999.00 |
| £29,476.46 taxed at 35.75% | £10,537.83 |
Profit is now above £50,000, so Marginal Relief applies: £50,000 at 19% is £9,500, and the balance of £36,294.50 at the effective 26.5% marginal rate is £9,618.04.
Total tax: £34,790.38. Net in hand: £65,209.62. Effective rate 34.79%.
All salary: gross £87,608.70, employer NIC £12,391.30, income tax £22,475.48, employee NIC £3,762.77 — total £38,629.56. The split saves £3,839.18.
Note that the saving falls between £60,000 and £100,000. Once dividends push past £50,270 of total income they hit 35.75%, and the gap over salary narrows sharply.
Why the answer changed on 6 April 2026
Run the same three examples on 2025/26 dividend rates and the difference is straightforward, because nothing else moved — the Personal Allowance, the bands, employer NIC at 15% and the £5,000 secondary threshold are all unchanged from 2025/26.
| Profit before director’s pay | Total tax at 2025/26 dividend rates | Total tax at 2026/27 rates | Increase |
|---|---|---|---|
| £60,000 | £13,168.83 | £13,908.80 | £739.97 |
| £100,000 | £33,456.85 | £34,790.38 | £1,333.53 |
The rise does not change the shape of the answer at these levels — a modest salary plus dividends is still cheaper than all salary. It does two other things.
It narrows the margin. At basic rate, dividends deliver 72.3p per £1 of pre-tax profit against 62.6p for salary. On 2025/26 rates that dividend figure was 73.9p. The gap is closing.
It flips the answer for higher-rate extraction in the Marginal Relief band. Dividends at 35.75% only beat salary while the company’s effective Corporation Tax rate is below about 21.5%. On profits between £50,000 and £250,000 the marginal rate is 26.5%, so higher-rate salary (50.4p) now beats a higher-rate dividend (47.2p) at the margin. That is not intuitive and most calculators do not surface it.
What a calculator will not tell you
The arithmetic is the easy part. These are the things that decide whether the answer is usable:
- Distributable profits. You cannot pay a dividend the reserves do not support, whatever the calculator says. Accumulated realised profits less accumulated realised losses, after Corporation Tax.
- Your Employment Allowance position. If the company has a second employee paid above the £5,000 secondary threshold, employer NIC on the director’s salary is likely covered by the £10,500 allowance — and the whole table shifts.
- Other income. Rental income, a pension, employment elsewhere. It all sits in the same bands and pushes the dividend up the scale.
- Mortgage and benefit calculations. Some lenders treat dividends differently from salary. A £12,570 salary can be a problem in an application.
- State pension record. A salary at or above the £6,708 Lower Earnings Limit protects the qualifying year.
- Timing. A dividend voted on 4 April lands in a different tax year from one voted on 7 April, and the paperwork has to be right.
Frequently asked questions
What is the optimal salary and dividend split for 2026/27?
For a single-director company with no Employment Allowance and enough profit, a salary at the £12,570 Personal Allowance plus dividends is the usual starting point. Salary up to that level delivers about 87p of every £1 of pre-tax profit to the director; a dividend delivers 81p at best and 72.3p once basic-rate dividend tax applies. Above the Personal Allowance the position reverses and dividends become the cheaper route.
Is salary or dividend better in 2026/27?
Both, in sequence. Salary up to the Personal Allowance, then dividends. Dividends attract no National Insurance and are taxed at 10.75% rather than 20% plus 8%, but they are paid out of profit that has already borne Corporation Tax. Salary is deductible for Corporation Tax but carries 15% employer and 8% employee National Insurance.
How much tax will I pay on £60,000 of company profit?
On a £12,570 salary plus the balance as dividends, roughly £13,909 in total — £1,135.50 employer National Insurance, £8,795.96 Corporation Tax and £3,977.34 dividend tax, leaving £46,091.20. Paying the whole £60,000 as salary would cost about £18,803 in tax instead.
Did the 6 April 2026 dividend rise change the best split?
It narrowed the margin rather than reversing it. Basic and higher dividend rates rose two points, to 10.75% and 35.75%. On a £60,000 profit the same structure costs about £740 more than it did in 2025/26. The one place the answer genuinely flips is higher-rate extraction where the company is paying Corporation Tax in the 26.5% Marginal Relief band — there, salary is now the cheaper route at the margin.
Can I take dividends if the company made a loss?
Not from that year’s profit, but possibly from accumulated reserves. The test is cumulative: accumulated realised profits less accumulated realised losses since incorporation, not the current year alone. A dividend paid without sufficient distributable profits is unlawful, and HMRC can treat it as a director’s loan.
Getting the salary side right
The dividend half of the split is a decision. The salary half is a monthly compliance obligation — real-time information submissions to HMRC every pay run, whether the salary is £5,000 or £50,000, plus auto-enrolment assessments, payslips, a P60 and year-end returns. Miss a submission and the penalties come regardless of how elegant the planning was.
SmartFiling runs RTI payroll from £15 per employee per month, including auto-enrolment, payslips, P60s and year-end returns. Every client’s work is reviewed by an ICAEW Chartered Accountant, and the whole process is online.
