Why the salary and dividend split matters
A limited company is a separate legal entity from you. It pays corporation tax on its profits. What remains after corporation tax is distributable profit, which can be paid to shareholders as dividends. Salary, on the other hand, is an expense of the company, it reduces the profit on which corporation tax is calculated, but it also attracts income tax and National Insurance at employment rates.
The optimal strategy for most owner-directors is to take a salary up to the National Insurance primary threshold or personal allowance (whichever is more favourable), and take the rest as dividends. This is sometimes called the "low salary, high dividend" approach.
The standard optimal salary: £12,570
Taking a salary equal to the personal allowance (£12,570) means no income tax and no employee NI is due. The salary is also a deductible business expense, reducing the company's corporation tax bill. This saves corporation tax of £2,388 (19% of £12,570) compared to taking the same amount as dividends, but only if the company has no other employees and the director handles their own employment administration.
Corporation tax on dividends
Dividends are paid from post-corporation-tax profits. Every pound of dividend requires the company to earn more than a pound before tax. For a small company paying 19% corporation tax, you need £1.23 of profit to pay £1 of dividend. This "grossing up" effect is why taking dividends is not completely free of tax, corporation tax has already been paid on that money.
Dividend tax rates vs income tax + NI
Dividend tax rates are 10.75% (basic), 35.75% (higher), and 39.35% (additional). These are meaningfully lower than the equivalent salary rates of 20% income tax plus 8% employee NI plus 15% employer NI. Even after corporation tax, the total effective rate on dividend income is usually lower than on salary at the same level. The exact breakeven depends on the corporation tax rate applicable to your company.
| Tax | On salary | On dividends |
|---|---|---|
| Corporation tax | Not applicable (salary is deductible) | 19% or 25% paid before dividend |
| Income tax | 20% / 40% / 45% | 10.75% / 35.75% / 39.35% |
| Employee NI | 8% / 2% | None |
| Employer NI | 15% above £5,000 | None |
Employment Allowance: If your company has other employees (not just you as the sole director), you may be eligible for Employment Allowance of up to £10,500 per year, which reduces the employer NI bill. This changes the optimal salary calculation and may make a higher salary more tax-efficient. The calculator above does not include Employment Allowance.
Frequently asked questions
Technically yes, but it is not usually optimal. Dividends attract no NI, but the company still pays corporation tax on the profit before the dividend is paid. More importantly, taking no salary at all means you do not accrue a qualifying year for State Pension purposes unless you have other NI contributions. Most accountants recommend a minimum salary at least equal to the Lower Earnings Limit (£6,396 for 2026/27) to maintain NI record, or the full personal allowance (£12,570) if you handle your own payroll administration.
Yes. If you pay yourself a salary, your company must register as an employer with HMRC and run PAYE. This involves submitting Real Time Information (RTI) reports each time you pay yourself, even if no tax or NI is due. Many small company directors pay themselves a salary below the NI threshold specifically to keep payroll administration minimal, a salary at the personal allowance of £12,570 means no deductions to process, just a monthly RTI submission. Many contractor accountants include this in their service packages.
A higher salary makes sense in several circumstances. If you are applying for a mortgage, lenders typically require two or three years of salary evidence at a level that supports the borrowing, dividend income is treated less favourably or excluded entirely by some lenders. If you are contributing to a pension, your maximum annual pension contribution is capped at your earned income (salary), not dividends. If you have Employment Allowance available, the employer NI cost of a higher salary is reduced or eliminated. And if your company qualifies for R&D tax credits or other reliefs based on staff costs, a higher salary increases the qualifying base.
For a sole director who is the only employee, the standard recommendation for 2026/27 is a salary of £12,570. At this level, no income tax is due because the salary equals the personal allowance, and employee NI is also nil because the primary threshold is £12,570. No employer NI is due either. The salary is fully deductible from company profits, saving corporation tax of approximately £2,388 at the small profits rate of 19%. Any income above this should typically be taken as dividends up to the basic rate threshold, then as retained profits held in the company if further efficiency is needed.
Related calculators
Tax Toolkit UK provides free calculators for guidance purposes only. Results are estimates based on HMRC rates for the 2026/27 tax year. Individual circumstances vary. Always consult a qualified accountant before setting your company remuneration strategy.