The salary and dividend split is the defining extraction decision for most owner-managed limited companies. A poorly structured split leaves thousands in unnecessary National Insurance. A well-structured split minimises combined tax across the company and personal layers. This guide explains the mechanics for 2026/27 with worked examples at different profit levels.
Updated 2026/27 · LimitedCompanyTaxCalculator.co.uk · Editorial standards · Methodology
Salary is a company expense and reduces taxable profit before corporation tax. It creates employer NI at 15% on salary above the secondary threshold, which is £5,000 for 2026/27. In other words, the company pays 15% employer NI on the portion of salary above £5,000; salary at or below £5,000 triggers no employer NI at all.
Dividends are not a company expense. They are paid from post-corporation-tax profit. The company pays corporation tax first; whatever is left is available for distribution as dividends. Dividends are taxed at dividend tax rates: 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate) for 2026/27. The first £500 per year is covered by the dividend allowance.
The combination that minimises total tax typically involves: (1) salary set to £12,570 (full personal allowance; employer NI covered by the Employment Allowance where eligible, otherwise outweighed by the corporation tax saving), or £5,000 for a sole-director company wanting zero employer NI, (2) dividends up to the basic rate threshold (£50,270 minus salary) at 10.75%, (3) anything above that retained in the company or contributed to a pension.
Personal allowance: £12,570. The first £12,570 of personal income is tax-free. With salary set at £12,570, the entire personal allowance is used by salary. Dividends then start at zero tax until £500 allowance is exhausted.
Basic rate threshold: £50,270. Total personal income up to £50,270 is within the basic rate band. Dividends within this band (above the £500 allowance) are taxed at 10.75%. With a £12,570 salary, the remaining basic rate band available for dividends is approximately £37,700.
Higher rate threshold: £50,270 to £125,140. Dividends in this range are taxed at 35.75%. The jump from 10.75% to 35.75% at the £50,270 threshold is the most significant dividend planning boundary. For most directors, keeping total income below £50,270 by retaining additional profit in the company is more efficient than taking higher-rate dividends.
Company profit before salary: £90,000. The director needs to decide on salary and dividend levels. Step 1: Set salary at £12,570. Employer NI: 15% × (£12,570 − £5,000) = £1,139. Taxable profit: £90,000 − £12,570 − £1,139 = £76,291. Corporation tax at marginal relief: approximately £18,497. Post-tax dividends available: £76,291 − £18,497 = £57,794.
Step 2: Decide dividend level. Option A, take all £57,794 as dividends. Total personal income: £12,570 + £57,794 = £70,364. Higher-rate dividends: £70,364 − £50,270 = £20,094 at 35.75% = £7,184. Basic-rate dividends: £37,200 at 10.75% = £3,999. Total dividend tax: approximately £11,183. Total tax: £18,497 + £1,139 + £11,183 = £30,819. Personal take-home: approximately £59,611.
Option B, take £37,200 in dividends (staying in basic rate band). Total personal income: £12,570 + £37,200 = £49,770. Dividend tax: £37,200 at 10.75% = £3,999 (approximately). Total tax: £18,497 + £1,139 + £3,255 = £22,891. Personal take-home: approximately £46,515. Company retains £57,794 − £37,200 = £20,594. Saving from Option B vs Option A: approximately £6,782 in dividend tax deferred. The retained £20,594 remains in the company having already paid corporation tax.
At £90,000 profit, the director in Option A is taking dividends at 35.75% higher rate on £20,094. An alternative: instead of taking those higher-rate dividends, the company makes a pension contribution of £20,094 before the corporation tax calculation.
With £20,094 pension: taxable profit becomes £90,000 − £12,570 − £1,139 − £20,094 = £56,197. Corporation tax at marginal relief: approximately £12,672. Post-tax profit for dividends: £43,525. Director takes £37,200 as basic-rate dividends. Personal income: £49,770. Dividend tax: approximately £3,255. Total tax: £12,672 + £1,139 + £3,255 = £17,066. Saving versus Option A: £29,673 − £17,066 = £12,607 in total tax savings, though the pension contribution is not immediately accessible.
The pension route saves £12,607 in combined tax compared to full extraction. The trade-off: £20,094 is locked in a pension rather than accessible now. For directors who can afford to defer this income to retirement, the pension route is dramatically more tax-efficient than taking higher-rate dividends.
For most directors, salary at £12,570 (using the full personal allowance) and dividends up to the basic rate threshold (approximately £37,700 in dividends, giving total income of £50,270). This minimises NI and keeps dividends taxed at 10.75%. Above this, retained profit or pension contributions are usually more efficient than higher-rate dividends.
Approximately £37,700 in dividends (if salary is £12,570), bringing total income to £50,270, the higher rate threshold. The first £500 of dividends is tax-free (dividend allowance). The remaining £37,200 attracts 10.75% dividend tax (approximately £3,999).
From a tax perspective, yes, retaining profit defers higher-rate dividend tax. But retention isn't always practical: the director may need the income. And retained profit has its own considerations: it remains in the company, can be extracted later, but also increases the company's asset value.
Yes, if the spouse genuinely holds shares in the company. Dividends are paid proportionally to shareholding, not as a discretionary sum. If a spouse holds, say, 40% of shares, they receive 40% of any dividend declared. This must be a genuine shareholding, not a paper arrangement solely for tax purposes.
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.