The short answer
- For most one-person companies in 2026/27 the best salary is £12,570, with the rest of the profit paid as dividends.
- If the company can claim the Employment Allowance, because someone other than a sole director is on the payroll, a higher salary often wins.
- Dividend tax rose to 10.75% and 35.75% in April 2026, so the company route saves less than it used to, and on many profit levels a sole trader now keeps more.
| Company profit | Best salary | You keep | Sole trader keeps |
|---|---|---|---|
| £30,000 | £12,570 | £24,403 | £25,468 |
| £50,000 | £12,570 | £38,862 | £40,268 |
| £80,000 | £12,570 | £55,765 | £57,711 |
| £100,000 | £12,570 | £65,210 | £69,311 |
| £150,000 | £87,610 | £87,464 | £92,040 |
The comparison ignores the extra costs of running a company, such as accountancy and filing, which widen the gap further.
The layers of tax
Money that reaches a director from their company can be taxed up to five times:
- SalaryEmployer National Insurance
15% on salary above £5,000, paid by the company. It is deductible for Corporation Tax.
- SalaryIncome Tax and employee NI
Income Tax above £12,570; employee NI at 8% above £12,570 and 2% above £50,270.
- ProfitCorporation Tax
19% to 25% on what is left after salary, employer NI and pension contributions.
- DividendsDividend tax
On dividends above the £500 allowance, at 10.75%, 35.75% or 39.35%.
Salary is deductible for Corporation Tax but attracts National Insurance. Dividends carry no National Insurance but are paid from profit that has already borne Corporation Tax. The best mix balances the two.
Choosing a salary
| Salary | Employer NI | Corporation Tax | You keep |
|---|---|---|---|
| £0 | £0 | £17,450 | £54,161 |
| £5,000 | £0 | £16,125 | £55,012 |
| £6,708 | £256 | £15,604 | £55,182 |
| £12,570 | £1,136 | £13,818 | £55,765 |
Why £12,570 usually wins
A salary up to £12,570 uses your Personal Allowance, so there is no Income Tax or employee NI on it. It does cost employer NI above £5,000, but the salary and that NI both save Corporation Tax at 19% to 26.5%, which more than covers it. Taking the same money as dividends would mean paying Corporation Tax first and dividend tax afterwards.
The State Pension
A salary of at least the Lower Earnings Limit, £6,708 in 2026/27, makes the year count towards your State Pension even though no employee NI is paid. A salary of £0 or £5,000 does not. With 35 qualifying years needed for the full new State Pension, this is worth more than the few hundred pounds of tax involved.
How dividends are taxed
Dividends sit on top of your other income, including your salary. The first £500 is tax-free; above that, the rate depends on which Income Tax band the dividends fall in.
| Band | Until April 2026 | From April 2026 |
|---|---|---|
| Basic rate | 8.75% | 10.75% |
| Higher rate | 33.75% | 35.75% |
| Additional rate | 39.35% | 39.35% |
The dividend allowance does not add to your basic rate band: £500 of dividends inside the basic band still uses up £500 of it. Scottish taxpayers pay Scottish rates on their salary but the UK dividend rates and bands above.
Paid through Self Assessment
Dividend tax is not taken at source. Directors who take dividends above £500 must file a tax return and may have payments on account. See the payment on account calculator.
A full worked example
- Company profit before salary£80,000
- Salary−£12,570
- Employer NI: 15% of £7,570−£1,136
- Corporation Tax on £66,295−£13,818
- Dividends paid£52,476
- Dividend tax−£9,282
- Salary after tax and NI£12,570
Of the £80,000, £24,235 goes in tax: £13,818 Corporation Tax, £1,136 employer NI and £9,282 dividend tax. The same profit as a sole trader would leave £57,711, about £1,946 more, before any company running costs.
The Employment Allowance
The Employment Allowance takes up to £10,500 a year off a company’s employer NI bill. Since April 2025 there is no upper size limit, but one rule matters for small companies: a company whose only employee is a single director cannot claim it.
If the company has another employee, such as a second director on a salary or a genuine member of staff, the allowance usually covers the director’s employer NI as well. That changes the best salary:
- Best salary
- £12,570
- You keep
- £55,765
- £12,570 salary
- £56,301
- Best salary
- £75,000
- You keep
- £56,838
With the allowance, salary costs no employer NI until the allowance runs out at £75,000. Salary taxed at 42% in the higher rate band then beats dividends, which bear Corporation Tax at 26.5% and dividend tax at 35.75%. The allowance has to cover all your employees, though, so the real best salary depends on the rest of your payroll.
Higher profits
Once dividends reach the higher rate band, the combined tax on a pound of profit paid as a dividend is high: Corporation Tax at 25% to 26.5%, then 35.75% on what is left. A higher-rate salary costs 15% employer NI, 40% Income Tax and 2% employee NI, but saves Corporation Tax.
After the 2026 dividend rise, the two are close, and the calculator finds that at £150,000 of profit a single director keeps slightly more with a salary of about £87,610 than with £12,570: £87,464 against £86,759. The difference is small and sensitive to other income, so check your own figures.
The £100,000 trap still applies
Salary and dividends together count towards adjusted net income. Above £100,000 you lose £1 of Personal Allowance for every £2, so leaving profit in the company or paying more into a pension can be worth far more than fine-tuning the split.
Employer pension contributions
An employer pension contribution is often the most tax-efficient way to take money out. It is deductible for Corporation Tax, carries no National Insurance, and is not taxed as your income when it goes in.
- Take-home without the pension£55,765
- Take-home with the pension£51,043
- Paid into your pension+£10,000
The £10,000 pension costs you only £4,722 of take-home pay. Pension money is locked away until at least 55 (57 from 2028), and the annual allowance of £60,000 applies to all contributions together.
Company or sole trader?
In 2026/27 a sole trader keeps more than a single-director company paying out all its profit, at every level in the table above. The company route can still make sense when:
- you leave profit in the company to reinvest, so dividend tax is deferred;
- you use employer pension contributions heavily;
- a spouse or partner is a genuine shareholder with an unused basic rate band;
- limited liability, investment or contracts require a company;
- the Employment Allowance applies because the company employs others.
Compare with the sole trader tax calculator and the Corporation Tax calculator.
Rules for paying dividends
- Dividends can only be paid from distributable profits: accumulated profits after tax.
- The directors must decide to pay them, usually recorded in board minutes.
- Each payment needs a dividend voucher showing the date, the company, the shareholder and the amount.
- Dividends are paid to shareholders in proportion to their shares, unless there are different share classes.
- Salary must go through payroll with Real Time Information submissions to HMRC.
Illegal dividends
A dividend paid without enough distributable profits can be reclaimed from the shareholder, and HMRC may treat it as salary or a loan. Check the company’s accounts before each payment.
Timing dividends across tax years
Dividends are taxed in the tax year they are paid, so spreading them evenly can keep more of them in the basic rate band. With a £12,570 salary each year:
- Dividend tax
- £21,624
- Band reached
- Higher rate
- Dividend tax
- £12,145 in total
- Saving
- £9,479
A dividend paid on 5 April falls in one tax year and a dividend paid on 6 April in the next, so a few days can make a big difference. The company must have enough distributable profits at the date of each payment.
Leaving profit in the company
The calculator assumes all profit is paid out, which shows the full tax. Many directors take only enough to use the basic rate band and leave the rest in the company.
- Paid out in full: £67,176 of dividends£14,537 dividend tax
- You keep if all paid out£65,210
- Basic rate only: £37,700 of dividends£3,999 dividend tax
- You keep this year£46,271
The profit left in the company has paid Corporation Tax but no dividend tax yet. It can be paid out in a later year when your income is lower, invested in the business, or paid into a pension. Holding large cash balances for years with no business purpose can cause problems if the company is sold or wound up, so get advice if it builds up.
A spouse or partner as shareholder
If a spouse or civil partner genuinely owns shares, dividends on their shares are taxed at their rates, which can use an unused Personal Allowance and basic rate band.
On £67,176 of dividends, one director with a £12,570 salary pays £14,537 of dividend tax. Split equally with a spouse who has no other income, the total falls to £5,763.
It has to be real
The shares must be an outright gift with full rights to income and capital. Arrangements that only divert dividends, such as shares with no rights except to dividends, can be caught by the settlements rules, and the income taxed as yours. Take advice before giving shares away.
Director's loans
Money you take from the company that is not salary, dividends or expenses goes into a director’s loan account. If the loan is still outstanding nine months after the company’s year end, the company pays a temporary tax charge on it, at the higher dividend rate, which it gets back once the loan is repaid.
Loans over £10,000 at no or low interest can also create a taxable benefit in kind. Borrowing from the company is not a way to avoid tax on extracting profit; it only delays the decision.