Limited Company Tax Planning
Dividend vs Salary — Which Is More Tax Efficient?
Tax Year
2026/27
Corp Tax Rate
19%
Dividend Allowance
£500
Dividend vs salary is one of the most important tax decisions for limited company directors. Enter your expected income and company expenses to see your take-home pay under a standard PAYE arrangement versus the classic director salary plus dividends strategy, using current 2026/27 HMRC rates.
Your Details
PAYE Breakdown
Annual Saving with LTD Structure
£0
PAYE Take-Home
£0
LTD Take-Home
£0
PAYE Eff. Tax Rate
0%
LTD Eff. Tax Rate
0%
LTD Director Breakdown
How the dividend vs salary calculator works
The calculator runs two scenarios side by side. In the PAYE scenario, your entire income is treated as employment earnings: income tax is applied at 20%, 40%, or 45% depending on which bands you cross, and employee National Insurance at 8% up to £50,270 and 2% above. The result is your straightforward employed take-home pay.
In the LTD scenario, the calculator uses the most common director structure: a salary set at the personal allowance (£12,570) to use up the tax-free threshold, with the remainder drawn as dividends from post-corporation-tax profits. Employer National Insurance applies only on the salary above the secondary threshold of £9,100, amounting to around £479 per year. Corporation tax at 19% is deducted from company profits before dividends can be paid out. Dividend tax then applies at 8.75% for basic-rate income and 33.75% for higher-rate income, after the £500 dividend allowance.
The annual saving figure at the top of the results shows the difference in take-home pay between the two approaches. Effective tax rate is calculated as total tax paid divided by gross income, giving a single percentage you can use to compare the real cost of each structure.
What you need to know before switching to dividends
Get an accountant first. The dividend and salary split shown here is the optimal structure on paper, but everyone’s circumstances differ. An accountant will factor in your existing pension, spouse’s income, retained profits, and any benefits in kind. Accountancy fees for a small limited company typically run from £500 to £2,000 per year — budget for this when comparing overall costs.
IR35 is the critical risk. HMRC’s IR35 rules exist to prevent “disguised employment”. If your working arrangement looks like an employment relationship — single client, working set hours, using client equipment — HMRC may deem you inside IR35. If caught, all income is taxed as employment earnings and the dividend saving evaporates. Assess your IR35 status carefully before proceeding, and consider professional IR35 insurance.
Admin costs are real. Running a limited company means annual confirmation statements, Corporation Tax returns, annual accounts, and directors’ responsibilities under the Companies Act. These obligations cost time and money even if you use an accountant. For income below around £30,000, the tax saving may be marginal once costs are included.
Frequently asked questions
Is it more tax efficient to take dividends or salary?
For most limited company directors, a combination of a low salary (at the personal allowance of £12,570) plus dividends is more tax efficient than a full PAYE salary. This avoids employer and employee National Insurance on the bulk of your income, and dividend tax rates are lower than income tax rates. The saving can be several thousand pounds per year, though the exact amount depends on your income level and company expenses.
What is the optimal director salary for 2026/27?
The most common strategy for 2026/27 is to set your director salary at £12,570 — the personal allowance threshold. This means zero income tax on the salary, and while there is a small amount of employer National Insurance on the portion above £9,100 (the secondary threshold), the overall tax cost is far lower than drawing the same amount as a higher PAYE salary.
How are dividends taxed in the UK for 2026/27?
The first £500 of dividend income is tax-free (the dividend allowance). Above that, basic-rate taxpayers pay 8.75% dividend tax, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%. Dividends sit on top of your other income for tax purposes, so your salary determines which band your dividends fall into.
What is IR35 and does it affect the dividend vs salary comparison?
IR35 is anti-avoidance legislation that applies if HMRC determines your working arrangement resembles employment rather than genuine self-employment. If IR35 applies, your income is taxed as employment income — meaning full PAYE tax and National Insurance — and the dividend strategy loses most of its advantage. Always assess your IR35 status before structuring your income as a limited company director.
Does running a limited company cost more than being employed?
Yes. A limited company has ongoing costs including accountancy fees (typically £500–£2,000 per year), Companies House filing fees, and additional administration time. These costs reduce but do not eliminate the tax saving compared with PAYE employment. For lower income levels, the net benefit may be small once accountancy costs are factored in.