Your company pays Corporation Tax on its taxable profit. You then pay personal tax on salary and dividends, and salary can also create employee and employer National Insurance. The useful comparison is how much of the same company profit reaches you after all of those charges. A low personal dividend-tax bill alone does not establish which route leaves you better off.
The rates for 2026/27
Dividends paid from 6 April 2026 use rates of 10.75%, 35.75% and 39.35%. The dividend allowance remains £500 and uses part of the relevant tax band. The standard Personal Allowance is £12,570, reduced by £1 for each £2 of adjusted net income above £100,000. It is fully lost at £125,140. England, Wales and Northern Ireland salary rates are 20%, 40% and 45%; Scottish salary bands and rates differ. Dividend rates are UK-wide.
For a full-year director on standard National Insurance rates, employee contributions are 8% on salary between £12,570 and £50,270 and 2% above that. Employer contributions are 15% above £5,000. The Lower Earnings Limit is £6,708: meeting it can protect a qualifying year even when no employee contributions are payable. A £5,000 salary alone does not reach that limit. Other contribution records or credits may still qualify you.
Eligible employers can use up to £10,500 of Employment Allowance against employer National Insurance. A company whose only employee above the secondary threshold is its sole director cannot claim it. Available allowance depends on the whole payroll, so do not assume it can all be used for the director. See our director payroll guide.
Why £12,570 is a comparison point
With no other income and the full Personal Allowance, a £12,570 salary has no employee National Insurance or salary Income Tax. It creates £1,135.50 of employer National Insurance before Employment Allowance. Salary and the employer contribution normally reduce taxable company profit where the business deduction conditions are met.
That does not make £12,570 the best salary at every profit. Corporation Tax relief, the Personal Allowance taper and the combination of salary and dividend bands can favour a higher salary. At low profits, the company may not be able to fund £12,570 plus employer contributions. Compare all affordable salary amounts with the cash you need, your other income and any pension contribution.
An £80,000 profit example
This illustration uses £80,000 of company profit before director remuneration, a twelve-month period, one company, no associated companies or exempt distributions, no Employment Allowance and no other personal income. The director takes a £12,570 salary and £37,700 of dividends, leaving the rest in the company. It shows a chosen withdrawal level, not the salary that necessarily maximises all available personal cash.
| Calculation | Amount |
|---|---|
| Company profit before remuneration | £80,000.00 |
| Salary | £12,570.00 |
| Employer National Insurance | £1,135.50 |
| Company profit subject to Corporation Tax | £66,294.50 |
| Corporation Tax after Marginal Relief | £13,818.04 |
| Profit available after that tax | £52,476.46 |
| Dividends paid | £37,700.00 |
| Dividend tax: £37,200 at 10.75% | £3,999.00 |
| Personal cash after tax | £46,271.00 |
| Profit retained in the company | £14,776.46 |
The company profit falls in the Marginal Relief band, so applying 19% to the whole £66,294.50 would understate Corporation Tax. If the remaining company profit is later paid as dividends, further personal tax may arise. Company money retained for later use is not the same as cash in your bank account. Compare a sole trader and a company using the same withdrawal assumptions.
Our Owner-Manager Tax Index compares fully withdrawn profit and separately examines retention and employer pension contributions. The director-pay calculator lets you enter your own circumstances. Its assumptions must match the research before you compare results.
How to pay a dividend
A dividend must be supported by distributable profits after allowing for tax and accumulated losses. Check the relevant accounts, approve the distribution and prepare the minutes and voucher. Cash in the bank is not evidence of distributable profit. Shareholders receive dividends according to their share rights.
The tax year depends on when a dividend becomes due and payable. An interim dividend is normally taxable when paid or made unreservedly available; a final dividend can become due when declared unless a later payment date is specified. Do not backdate the paperwork. Money drawn before it is salary, an expense repayment or a valid dividend may be a director loan.
Check other income and family circumstances
The £50,270 higher-rate threshold assumes the full Personal Allowance and the standard basic-rate band. Other income, pension relief and allowance tapering can change where your dividends fall. Above £100,000 adjusted net income, losing the Personal Allowance can increase the marginal tax cost, but the familiar 60% figure for salary is not a universal rate for dividends. Calculate the actual income mix.
The High Income Child Benefit Charge starts above £60,000 adjusted net income and recovers all Child Benefit at £80,000. The higher-income partner is responsible where the conditions apply. Student loans and other income-linked charges can also alter your cash result. These are reasons to enter complete figures before choosing a salary.
When an employer pension contribution helps
A qualifying employer pension contribution can reduce Corporation Tax without salary Income Tax or National Insurance on the payment. It adds retirement savings, rather than cash available now. The tax saving depends on the company profits affected: it can be 19%, 25% or 26.5% for profit within the Marginal Relief band. Relief normally follows payment, subject to the business purpose and any spreading rules.
The standard pension annual allowance is £60,000 across relevant contributions and accruals. Tapering can apply when threshold income exceeds £200,000 and adjusted income exceeds £260,000. The Money Purchase Annual Allowance can restrict defined-contribution saving to £10,000 after certain flexible withdrawals. Carry-forward has conditions and cannot increase that £10,000 limit. Check all pension arrangements before paying. See employer pension contributions.
If you have lent money to the company
Repaying genuine loan principal owed to you normally creates no further personal tax. Interest is separate: agree and document a commercial rate for the actual loan. The company normally deducts basic-rate Income Tax from yearly interest paid to an individual and reports and pays it using form CT61. You report the gross interest and tax deducted; any Personal Savings Allowance depends on your tax position. It is not a dividend or an automatic tax-free withdrawal.
Common salary and dividend questions
Include any company car when comparing your overall pay arrangements. The company's tax relief and your personal tax charge both matter. Our company car and vehicle tax guide explains the comparison with using your own car and claiming business mileage.
Is a small salary always best? No. The answer depends on profit, other income, allowance eligibility and withdrawals. Compare the total company and personal tax across affordable salaries.
Do dividends reduce Corporation Tax? No. They are paid from distributable profits after company tax. Salary and employer National Insurance normally reduce taxable profit where deductible.
Can I change the amounts during the year? Yes, with the right payroll treatment and dividend approvals. Review the annual position before changes, and use current accounts to check that dividends are covered.
Official sources
Checked 6 September 2026: dividend rates, payroll rates, Employment Allowance, pension allowances, Child Benefit charge and lending to your company.