Salary and dividend planner: pay-planning guide 2026/27

Why salary and dividends are taxed differently

As a director of a limited company, you choose how to draw income from the business: as salary (subject to income tax, employee NIC and employer NIC) or as dividends (subject to dividend tax only, no NIC). The difference in effective rates creates the tax efficiency that makes the limited company structure attractive for many contractors.

Salary and employer NIC are deductible costs for corporation tax purposes, so the company receives relief on them. Dividends are paid from after-tax profit; they attract no NIC but the company gets no further deduction for them. The optimal split depends on the corporation tax relief you receive, the NIC cost of higher salary, and the dividend tax rates that apply at different income levels.

Dividend tax rates 2026/27

Under the Finance Act 2026 section 4, dividend tax rates from 6 April 2026 are:

• Basic rate band: 10.75%
• Higher rate band: 35.75%
• Additional rate band (above GBP125,140): 39.35%

The GBP500 dividend allowance means the first GBP500 of dividend income above the personal allowance is tax-free. This allowance was reduced from GBP1,000 in April 2024. Dividend allowance income still uses up the basic rate band.

Dividends drawn from a company in which you hold shares through an intermediary (for example a spouse) are outside this guide but carry anti-avoidance considerations under settlements legislation.

The optimal salary question

There is no single universal optimal salary. The right salary level depends on whether your company can claim the Employment Allowance, the value of state pension entitlement, your personal allowance, and any income you have from other sources.

The Employment Allowance fork

If your company employs more than one employee (or you have multiple companies that together qualify), the Employment Allowance of GBP5,000 per year (2024/25 and 2025/26) absorbs employer NIC up to that limit. If you qualify, the cost of a salary up to around GBP45,000 is different from a company that does not qualify. The Employment Allowance is not available to single-director companies where the director is the only employee.

NIC for state pension purposes

A salary of at least GBP6,396 a year (the lower earnings limit for 2026/27) gives you a qualifying year for state pension even though no NIC is due. A salary of GBP12,570 (the NIC primary threshold) keeps you above this threshold and avoids employee NIC, while the employer NIC applies to any salary above GBP5,000 (the secondary threshold, reduced from GBP9,100 from April 2025). For a single-director company without the Employment Allowance, the typical optimal salary is GBP12,570 to preserve state pension entitlement while limiting the employer NIC charge to GBP1,135 (15% on GBP7,570).

How the model works

The planner starts with your company profit (net of all business expenses), your chosen salary and your planned dividend drawings. It calculates:

• Employer NIC on the salary above GBP5,000
• Corporation tax on the profit after salary and employer NIC (with marginal relief if profit is between GBP50,000 and GBP250,000)
• Profit available for dividends after corporation tax
• A distribution check (dividends cannot exceed distributable profit)
• Personal income tax on salary (above personal allowance)
• Dividend tax using the 2026/27 banded rates and the GBP500 allowance
• Employee NIC on salary above GBP12,570
• Net personal income after all taxes
• A conservation check: company profit in should equal company tax out plus personal drawings

Pension contributions

Employer pension contributions from the company are a deductible cost before corporation tax. This means a pension contribution of GBP10,000 saves around GBP1,900 in corporation tax at the 19% small profits rate, or proportionally more at the marginal relief rate. Personal (employee) contributions receive income tax relief but no NIC relief. The planner does not include pension contributions by default; adjust the profit input to reflect contributions already paid by the company.

Adjusted net income and the personal allowance taper

If total income (salary plus dividends plus any other income) exceeds GBP100,000, the personal allowance reduces by GBP1 for every GBP2 of excess. At GBP125,140 the allowance is nil. This creates an effective 60% marginal rate on income between GBP100,000 and GBP125,140. Pension contributions can reduce adjusted net income below GBP100,000 and recover the allowance. The planner includes the taper calculation.

Associated companies and CT thresholds

The GBP50,000 (small profits rate) and GBP250,000 (full rate) corporation tax thresholds are divided by the number of associated companies. If you have a second company (for example a holding company or a spouse's company you control), the thresholds are halved, which can move you into the marginal relief zone at lower profit levels. The planner assumes one company; adjust the rate constants in the rates tab if you have associated companies.

Using the model

Enter your company profit (before salary), your chosen salary and your planned dividends. The model shows the full tax stack and your net personal income. Adjust the salary input to see the NIC and income tax trade-off. Adjust dividends to see where the higher rate threshold cuts in. The rates tab shows all 2026/27 constants.

The model is a planning tool. It does not account for other income sources, pension contributions already paid, Employment Allowance, or associated company threshold adjustments. A specialist can model your specific position and confirm the optimal pay structure for your company.