For a limited company director, the question of whether to draw money as salary or dividends is the single biggest tax decision of the year. The answer in 2026/27 is materially different from the answer in 2024/25, and the reason is mostly one number: dividend tax has gone up. From 6 April 2026, the basic-rate dividend tax rate is 10.75% (up from 8.75%) and the higher-rate dividend tax rate is 35.75% (up from 33.75%). Salary, meanwhile, looks better than it did, because the Employment Allowance now offsets up to £10,500 of employer NI for eligible companies. The optimum has shifted.
This calculator models the full year for you. Enter the total amount you want to extract from the company; the tool splits it into salary and dividends, runs the income tax, employee and employer National Insurance, dividend tax and corporation tax for both halves, and shows you the take-home and the total tax cost.
How the salary vs dividends maths works in 2026/27
Two things make salary tax-efficient at the right level. First, salary is a deductible expense for the company, which means it reduces corporation tax. At the small profits rate of 19%, every £1 of salary saves 19p of corporation tax. At the marginal rate of 26.5% (profits between £50,000 and £250,000), every £1 of salary saves 26.5p. Second, the Employment Allowance offsets up to £10,500 of employer NI for companies with two or more people on the payroll, so the employer NI cost on a £12,570 director salary often vanishes entirely.
Two things make dividends less tax-efficient than they used to be. The dividend allowance is now just £500 (down from £5,000 a few years ago). The basic-rate dividend tax rate is 10.75% from April 2026, an increase of two percentage points. Dividends are paid out of post-corporation-tax profit, so the company has already paid 19% to 25% before you pay personal tax on the dividend.
The standard 2026/27 result for a director who can claim the Employment Allowance is a salary of £12,570 (the personal allowance) plus dividends to fill the basic-rate band. For a sole director with no other employees who cannot claim the Employment Allowance, the picture is more nuanced; £6,708 (the lower earnings limit, which preserves the state pension qualifying year) is often within a few hundred pounds of £12,570 in net cost.
Worked example: £60,000 extracted in 2026/27
Take a director who wants £60,000 out of a company that can claim the Employment Allowance and has £80,000 of pre-salary profit.
A salary of £12,570 generates no income tax (covered by the personal allowance) and no employee NI (the primary threshold sits at £12,570). Employer NI on £12,570 would normally be (£12,570 − £5,000) Ã, 15% = £1,135.50, but the Employment Allowance covers it. Corporation tax on the remaining £80,000 − £12,570 = £67,430 is in the marginal band: tax of £14,037 after marginal relief.
That leaves £67,430 − £14,037 = £53,393 of post-tax profit available for dividends. The director takes £47,430 as a dividend (to bring their total extraction to £60,000). The first £500 is covered by the dividend allowance. The next £37,200 sits in the basic-rate band (£12,570 personal allowance is already used, £37,700 basic-rate band remains, dividends use it next). Dividend tax in the basic-rate band: £37,200 Ã, 10.75% = £3,999. The remaining £9,730 is in the higher-rate band: £9,730 Ã, 35.75% = £3,478.
Total personal tax bill: £7,477. Total company tax bill: £14,037. The director nets £52,523 from the £60,000 extraction. Use the calculator to flex the split, the profit level and the Employment Allowance status to see how the answer changes.
When dividends still win
Dividends remain more efficient than additional salary above the personal allowance for almost every limited company director. The 26.5% marginal corporation tax rate plus 10.75% basic-rate dividend tax is still cheaper than the 20% income tax plus 8% employee NI plus 15% employer NI you would pay on additional salary, even after the corporation tax deduction. The key is to keep the salary at the optimal anchor point and use dividends for everything above that.
Key takeaways
- The optimum extraction strategy for 2026/27 starts with a £12,570 director salary if the company can claim the Employment Allowance, and dividends for everything above.
- Dividend tax rates rose by two percentage points from April 2026 (basic 10.75%, higher 35.75%), so the dividend half of the strategy is more expensive than it was.
- The £500 dividend allowance is a small but useful first slice; everything above it is taxed.
- Sole director companies cannot claim the Employment Allowance and often run with a £6,708 salary to avoid employer NI, though £12,570 is rarely far behind.
- Running this calculation cluster-by-cluster (salary, employer NI, corporation tax, dividend tax) gives the same answer as running it here, but this calculator stacks them for you.
Frequently asked questions
What’s the optimal director salary for 2026/27? For most limited companies that can claim the Employment Allowance, the optimal salary is £12,570 — the personal allowance. This generates no income tax and no employee NI for the director, and the Employment Allowance offsets the employer NI charge. For a sole director who cannot claim the Employment Allowance, £6,708 is often used, though £12,570 may be only £400–£500 worse off after the full year.
Has the £12,570 salary always been optimal? No. Before 2024/25, when employer NI was only triggered above £9,100, lower salaries were sometimes better. Since the secondary threshold dropped to £5,000 and dividend rates rose, £12,570 has firmed up as the default optimum for companies eligible for the Employment Allowance.
Do I need to take a salary at all? No, but not taking one means you don’t earn a qualifying year for the state pension, you can’t claim certain reliefs (for example, contributing to a salary sacrifice pension), and you may struggle with mortgage applications. Most directors take some salary even when pure dividends would be marginally cheaper.
Can I change my salary mid-year? Yes, though it adds payroll complexity and your annual position is what matters for tax. The cleanest approach is to set the salary at the start of the year using this calculator, then adjust dividend timing through the year based on company profits.