Director Tax Planning
Dividend vs Salary Calculator
for UK Company Directors 2025/26
Tax Year
2025/26
Strategies
3
Compare three ways to extract profit from your limited company: your chosen salary + dividends mix, all salary, or all dividends. Adjust the salary amount, add pension contributions, and see Corporation Tax, Income Tax, National Insurance and your actual take-home pay side by side using 2025/26 HMRC rates.
Company Details
Salary + dividends mix gives the highest take-home
Your Salary + Dividends Mix
£0
take-home pay
Effective Rate
0%
Salary
£0
Dividends
£0
Corp Tax
£0
Total Tax
£0
Pension
£0
All Salary
£0
take-home pay
Effective Rate
0%
Gross Salary
£0
Income Tax
£0
Employee NI
£0
Total Tax + NI
£0
All Dividends
£0
take-home pay
Effective Rate
0%
Corp Tax
£0
Dividends
£0
Dividend Tax
£0
Total Tax
£0
Why directors pay themselves this way
The salary-plus-dividends strategy exists because of a fundamental difference in how the UK taxes employment income versus investment income. Salary attracts both Income Tax (20–45%) and National Insurance (8% employee + 15% employer). Dividends attract only Dividend Tax (8.75–39.35%) — no NI at all — but the company must pay Corporation Tax (19–25%) on the profit before declaring dividends.
For most directors, the combined burden of Corporation Tax + Dividend Tax is significantly less than Income Tax + NI on the equivalent salary. The sweet spot is a salary of £12,570 (the Personal Allowance) — just enough to pay zero Income Tax and qualify for state pension credits — with everything else taken as dividends.
Pension contributions add another layer of efficiency. The company can make employer pension contributions that are fully deductible against Corporation Tax. A £20,000 company pension contribution saves up to £5,000 in Corp Tax, and the money enters your pension with no Income Tax or NI on either side. This is why many directors use a three-part strategy: low salary + pension contribution + dividends from what remains.
This is completely legal and widely accepted by HMRC for genuine company directors. However, if your contracts fall inside IR35, HMRC can treat your entire income as employment income regardless of how you extract it. The salary-plus-dividends strategy only works reliably outside IR35.
Worked examples
Four scenarios showing the optimal approach at different profit levels. Click each link to pre-fill the calculator and verify the numbers yourself.
Example 1: Sole director, £50,000 profit
Pre-fill calculator with these values →
Salary: £12,570 | Employer NI: £1,135.50
Taxable profit: £50,000 − £12,570 − £1,135.50 = £36,294.50
Corporation Tax (19%): £6,895.96
Dividends: £29,398.55 | Dividend Tax: £2,484.87
Total take-home: £39,483.67 | Effective rate: 21.0%
All salary would give ~£36,734. You save ~£2,750 with the optimal mix.
Example 2: Sole director, £100,000 profit (PA taper warning)
Pre-fill calculator with these values →
Salary: £12,570 | Employer NI: £1,135.50
Taxable profit: £86,294.50 | Corp Tax: ~£16,831 (marginal relief applies)
Dividends: ~£69,464 | Total income: £82,034 (salary + dividends)
Total take-home: ~£69,610 | Effective rate: 30.4%
Warning: if total income exceeds £100,000, your Personal Allowance starts to taper. At this profit level you're safe, but at £120k+ profit consider pension contributions to stay below the threshold.
Example 3: Two directors splitting £100,000 profit
Pre-fill calculator for each director's share (£50k each) →
Each director: £50,000 share | Each takes £12,570 salary + dividends
Per director: take-home ~£39,484 | Combined: ~£78,967
If one director took all £100k: take-home ~£69,610 (from Example 2)
Two-director saving: ~£9,357 per year
Splitting profit between two directors uses two Personal Allowances (£25,140 total) and two dividend allowances (£2,000 total), keeping both in the basic rate band.
Example 4: Director with £20,000 pension contribution
Pre-fill calculator with these values →
£80,000 profit | Salary: £12,570 | Pension: £20,000 | Employer NI: £1,135.50
Taxable profit: £80,000 − £12,570 − £1,135.50 − £20,000 = £46,294.50
Corp Tax (19%): £8,795.96 | Dividends: £37,498.55
Take-home cash: ~£47,384 | Plus £20,000 in pension pot
Without pension: take-home ~£55,050 but no pension savings
The £20,000 pension contribution saves ~£3,800 in Corp Tax. The real cost to you is only ~£7,666 in reduced take-home for £20,000 in your pension — an effective 62% employer contribution.
2025/26 tax rates for directors
| Tax | Band | On Salary | On Dividends |
|---|---|---|---|
| Personal Allowance | Up to £12,570 | 0% | 0% (£1,000 allowance) |
| Basic rate | £12,571 – £50,270 | 20% + 8% NI = 28% | 8.75% (after 19% Corp Tax) |
| Higher rate | £50,271 – £125,140 | 40% + 2% NI = 42% | 33.75% (after Corp Tax) |
| Additional rate | Above £125,140 | 45% + 2% NI = 47% | 39.35% (after 25% Corp Tax) |
| Employer NI | Above £5,000 | 15% (no cap) | N/A |
| Corporation Tax | On company profits | N/A (salary deductible) | 19% (≤£50k) / 25% (>£250k) |
Frequently asked questions
Is it better to take a salary or dividends as a director?
For most directors, a mix is most tax-efficient: salary of £12,570 to avoid Income Tax while maintaining NI state pension credits, then the rest as dividends which are not subject to National Insurance.
How much Corporation Tax do I pay before taking dividends?
19% on profits up to £50,000, 25% above £250,000, with marginal relief between. Corp Tax applies after deducting salary, employer NI, and pension contributions.
What are the dividend tax rates for 2025/26?
First £1,000 tax-free. Then 8.75% basic rate, 33.75% higher rate, 39.35% additional rate.
Do I pay National Insurance on dividends?
No. This is the main reason directors prefer dividends over salary above the Personal Allowance.
What salary should a director take in 2025/26?
£12,570 is the standard recommendation. Zero Income Tax, state pension qualifying year, and employer NI is only £1,135.50.
Can pension contributions reduce my Corporation Tax?
Yes. Employer pension contributions are fully deductible. A £20,000 contribution saves up to £5,000 in Corp Tax and enters your pension with no Income Tax or NI.
How does the £100,000 PA taper affect directors?
Total income over £100,000 triggers the taper, creating an effective 60% rate between £100,000 and £125,140. Use pension contributions to stay below.
Can two directors split the profit?
Yes. Equal shareholders split dividends equally, each using their own Personal Allowance and dividend allowance. This effectively doubles the tax-free thresholds.
Can HMRC challenge my salary and dividend split?
For genuine directors of their own company, HMRC accepts this strategy. If IR35 applies, HMRC can treat dividend income as employment income.
Related calculators
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