Salary vs Dividend Calculator UK

What the Calculator Results Mean

The calculator shows several key figures that help you understand your tax position and choose the optimal extraction strategy.

Total tax payable shows the combined Income Tax, employee National Insurance, and dividend tax you will pay personally. This figure helps you compare different extraction methods.

Corporation tax saving shows how much tax your company saves by paying you a salary instead of taking all income as dividends. Salary is deductible for corporation tax, so paying yourself a salary reduces your company's taxable profits.

Net income is the amount you actually receive after all taxes have been paid, both personally and by the company. This is the figure that matters most for your personal finances.

Effective tax rate shows the percentage of your total income that goes to tax. This helps you compare the overall efficiency of different extraction strategies.

The calculator also shows the breakdown of each tax component, so you can see exactly how much is going to Income Tax, National Insurance, and dividend tax for each option.

Example Calculation

The following example is illustrative only and assumes a company owner wanting to extract £50,000 from their business, with a corporation tax rate of 19% and basic rate taxpayer status.

The calculator compares three options: all salary, all dividends, and a mixed approach. A salary of £12,570 uses the full personal allowance, avoiding Income Tax, and is deductible for corporation tax.

The remaining £37,430 is taken as dividends. Dividends are taxed at 10.75% for basic rate taxpayers, with the dividend allowance of £500 applying first. The total tax and National Insurance cost is significantly lower than taking the entire amount as salary.

The example shows the total tax payable, the net income received, and the effective tax rate across all income sources. This allows you to see the benefit of the mixed approach compared to a pure salary or pure dividend strategy.

How the Calculator Compares Extraction Methods

The calculator compares three extraction methods: taking all income as salary, taking all income as dividends, and a mixed approach combining salary and dividends.

All salary: This option maximises the corporation tax saving because salary is fully deductible. However, it also incurs the highest National Insurance costs, including both employee and employer NI. The personal tax cost depends on your Income Tax band.

All dividends: This option avoids National Insurance entirely but does not save corporation tax. Dividend tax rates are lower than Income Tax rates, making this attractive for many directors. However, dividends can only be paid from distributable profits.

Mixed approach: This combines a modest salary with dividends. A salary of £5,000 or £12,570 is often considered. This approach balances the corporation tax saving from salary with the lower tax rates and NI avoidance of dividends.

The calculator shows the total tax cost and net income for each option, allowing you to compare the overall efficiency of each extraction method. The optimal approach depends on your total income, the company's profits, and your personal circumstances.

Salary vs Dividends: The Key Differences

The tax treatment of salary and dividends differs in several important ways. Understanding these differences is essential for making the right choice.

Corporation tax: Salary is deductible for corporation tax, reducing the company's taxable profits. Dividends are paid from after-tax profits and are not deductible. A salary of £10,000 saves the company between £1,900 and £2,500 in corporation tax, depending on the company's tax rate.

Income Tax: Salary is taxed at Income Tax rates of 20%, 40%, or 45%. Dividends are taxed at lower rates of 10.75%, 35.75%, or 39.35%. The dividend allowance of £500 means the first £500 of dividends each year is tax-free.

National Insurance: Salary attracts employee National Insurance at 8% on earnings between £12,570 and £50,270, and 2% above £50,270. Employers also pay National Insurance at 15% on salaries above £5,000. Dividends do not attract National Insurance at all.

Flexibility: Dividends can only be paid if the company has sufficient distributable profits. Salary must be paid regardless of profits, but can be varied more easily than dividends.

Tax timing: Salary tax is collected through PAYE in real time. Dividend tax is calculated annually through Self Assessment, giving you more time to pay.

Tax Rates for Salary and Dividends 2026/27

The table below shows the tax rates for salary and dividends for the 2026/27 tax year. These rates determine the tax cost of each extraction method.

Employer National Insurance of 15% applies to salary above £5,000 per year. This is an additional cost of employment that does not apply to dividends.

The dividend allowance of £500 per year means the first £500 of dividends is tax-free, regardless of your tax band.

Why the £5,000 Salary Is Often Considered

The National Insurance secondary threshold is £5,000 per year for the 2026/27 tax year. This is the level at which the company starts paying employer National Insurance on your salary.

Paying yourself a salary of £5,000 has several potential advantages. It is fully deductible for corporation tax, saving the company between £950 and £1,250 depending on the corporation tax rate. Depending on your total earnings and National Insurance record, a salary at or above the Lower Earnings Limit may also help towards a qualifying year for State Pension purposes. However, the State Pension rules are complex, and you should check your own National Insurance record to understand your position.

A £5,000 salary avoids employer National Insurance entirely, as employer NI is only payable on earnings above the secondary threshold. By keeping your salary at or below this level, you save the company 15% on the portion that would otherwise be taxable.

Some directors choose a salary of £12,570 to use the full personal allowance. This saves Income Tax but incurs employee National Insurance at 8% on the portion above the primary threshold, and employer National Insurance at 15% on the portion above the secondary threshold. For many directors, the extra tax and National Insurance may outweigh the corporation tax saving, depending on their circumstances.

National Insurance for Company Owners

National Insurance is one of the key differences between salary and dividends. Salary attracts both employee and employer National Insurance, while dividends attract none.

Employee National Insurance is paid on salary above the primary threshold of £12,570 per year at 8%, and 2% above £50,270. For a director earning £30,000, employee NI is 8% on £17,430, which is £1,394 per year.

Employer National Insurance is paid on salary above the secondary threshold of £5,000 per year at 15%. For a director earning £30,000, employer NI is 15% on £25,000, which is £3,750 per year.

Using the assumptions in this example, the combined National Insurance cost is approximately £5,144. This is a significant additional cost that does not apply to dividends.

By taking income as dividends instead of salary, you avoid both employee and employer National Insurance entirely. This is one of the main reasons dividends are often more tax-efficient for company owners.

Corporation Tax and Extraction

The corporation tax rate affects the relative benefit of salary versus dividends. When corporation tax is higher, salary becomes more attractive because the corporation tax saving is greater.

For the 2026/27 tax year, the corporation tax rates are 19% for profits up to £50,000, 25% for profits over £250,000, and marginal relief between these thresholds. A salary of £10,000 saves the company £1,900 at 19% or £2,500 at 25%.

The corporation tax saving must be weighed against the Income Tax and National Insurance costs of the salary. For basic rate taxpayers, the combined cost of Income Tax and employee National Insurance on salary above £12,570 is 28%, plus employer National Insurance of 15%. The corporation tax saving of 19% to 25% does not fully offset these costs.

For higher rate taxpayers, the combined cost of Income Tax and employee National Insurance on salary above £50,270 is 42%, plus employer National Insurance of 15%. The corporation tax saving does not offset these costs, making dividends significantly more attractive for higher rate taxpayers.

Common Extraction Mistakes

Several common mistakes can lead to higher tax bills or compliance issues. Understanding these helps you avoid costly errors.

Paying too much salary. Taking a high salary instead of dividends often increases your tax bill because of National Insurance. The tax advantage of dividends typically outweighs the corporation tax saving from a higher salary for many directors.

Paying no salary. While avoiding National Insurance, a zero salary means you lose out on the corporation tax deduction and may not build a State Pension qualifying year, depending on your National Insurance record. The £5,000 salary is often worth considering.

Ignoring the dividend allowance. Failing to use the £500 dividend allowance means you pay tax on dividends that could have been tax-free.

Not considering pension contributions. Company pension contributions are often more tax-efficient than salary or dividends. Missing this opportunity can mean paying more tax than necessary.

Forgetting employer National Insurance. When you pay yourself a salary above £5,000, the company must pay employer National Insurance at 15%. This is an additional cost of employment that reduces the tax benefit.