Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
The dividend ordinary rate rose to 10.75% from 6 April 2026, a 2 percentage point increase, while the dividend allowance held at £500 a year [1]. For the director of an owner-managed company who takes a salary and tops it up with dividends, that single change shifts the arithmetic of how company profit is best taken out.
Salary and dividends are two entirely separate payments, taxed under two different regimes. A salary runs through PAYE and attracts National Insurance, and it is a deductible cost for the company. A dividend is paid from profit the company has already paid Corporation Tax on, carries no National Insurance, and is taxed in the shareholder's hands at the dividend rates [2].
This article explains how each payment is taxed for the 2026-27 tax year, why directors so often combine the two, the two salary levels owner-managed companies gravitate towards, how dividend tax is actually calculated, and the legal steps a company must follow before it pays a dividend at all. It reports the rules rather than recommending a figure, because the right mix depends on each company's profit, the director's other income and the availability of reliefs.
Key takeaways
- A salary is a company expense that reduces taxable profit, while a dividend is paid from profit after Corporation Tax and is not deductible [2].
- Dividends carry no National Insurance, which is the main reason owner-managers take part of their income as dividends rather than salary [1].
- For the 2026-27 tax year the dividend allowance is £500, with dividend rates of 10.75% at the basic rate, 35.75% at the higher rate and 39.35% at the additional rate [1].
- A salary at or above the Lower Earnings Limit of £6,708 a year protects a qualifying year for contributory benefits even where no National Insurance is due below the Primary Threshold of £12,570 [4].
- A dividend can only be paid from available profit, after a directors' meeting that declares it and with a dividend voucher recorded, even in a single-director company [2].
Salary and dividends are taxed in completely different ways
The starting point for any owner-managed company is that a salary and a dividend are not two names for the same thing. They sit in different parts of the tax system, and the company's own tax position changes depending on which it pays.
How a director's salary is taxed
A salary is employment income. It runs through PAYE, is taxed at the income tax rates of 20%, 40% and 45% above the £12,570 Personal Allowance in England and Northern Ireland, and attracts both employee and employer National Insurance once the relevant thresholds are crossed [5]. Employee National Insurance is charged at 8% on earnings between the Primary Threshold of £12,570 and the Upper Earnings Limit of £50,270, and employer National Insurance at 15% on earnings above the Secondary Threshold of £5,000 [4].
The offsetting feature is that a salary, together with the employer National Insurance on it, is a deductible business expense. It reduces the company's taxable profit, and therefore its Corporation Tax bill [2]. Because a director is an office holder with an annual National Insurance earnings period, the salary must still be reported through Real Time Information on a Full Payment Submission on or before payday [8].
How a dividend is taxed
A dividend is not employment income and does not run through payroll. It is paid from profit the company has already paid Corporation Tax on, so it is not a deductible expense for the company [2]. The shareholder receives a £500 tax-free dividend allowance each year, and dividends above that are taxed at the dividend rates according to the shareholder's income tax band [1].
Crucially, dividends carry no National Insurance at all, for either the company or the shareholder [1]. That absence of National Insurance is the single feature that makes dividends attractive as a way of extracting profit, and it is why the salary-and-dividend mix exists in the first place. Companies running this mix through modern small business payroll software keep the salary side compliant while the dividend side is handled through the company's accounts.
Why directors combine a salary with dividends
The logic of the mix follows directly from the two tax treatments above. A small salary secures benefits that only employment income can provide, and dividends then deliver the rest of the income without a National Insurance charge.
A salary pitched at or above the Lower Earnings Limit of £6,708 a year protects the director's entitlement to contributory benefits, including the building of a qualifying year towards the State Pension, even though no employee National Insurance is actually due until earnings reach the £12,570 Primary Threshold [4]. A salary also uses the Personal Allowance efficiently, because the first £12,570 of employment income is free of income tax [5].
Dividends then top up the director's income. Because they attract no National Insurance and are taxed at rates below the equivalent salary-plus-National-Insurance cost for many owner-managers, they are the mechanism most owner-managed companies use to extract profit beyond the basic salary [1]. The trade-off is that a dividend requires available profit and comes out of money already taxed at the company's Corporation Tax rate of 19% on profits up to £50,000 or 25% above £250,000, with marginal relief in between [3]. An owner managing this alongside several clients will often use an accountant payroll platform to keep the salary filings consistent across each company.
The two common salary levels
Owner-managed companies tend to settle on one of two salary levels, and the choice turns on whether the company can claim the Employment Allowance. Both levels keep the director within or close to the Personal Allowance, so the salary itself carries little or no income tax [5].
The employer National Insurance that drives this choice is explained in Moonworkers' guide to employer National Insurance. The two levels are compared below for the 2026-27 tax year.
| Salary level | Employee NI | Employer NI before allowance | Typical reason |
|---|---|---|---|
| £5,000 (Secondary Threshold) | None | None | Avoids all employer NI where the Employment Allowance is unavailable |
| £12,570 (Primary Threshold) | None | £1,135.50 | Uses the full Personal Allowance; employer NI arises on the band above £5,000 |
A salary of £5,000 sits exactly at the Secondary Threshold, so the company pays no employer National Insurance on it, which suits a single-director company that cannot claim the Employment Allowance [4]. A salary of £12,570 uses the whole Personal Allowance and still carries no employee National Insurance, but it does create an employer National Insurance charge of 15% on the £7,570 between the Secondary and Primary Thresholds, which is £1,135.50 for the year [4].
Where the Employment Allowance changes the sums
The Employment Allowance lets an eligible employer reduce its employer National Insurance by up to £10,500 a year, which would wipe out the £1,135.50 charge on a £12,570 salary [6]. The obstacle for owner-managed companies is that a company whose only employee liable for secondary Class 1 National Insurance is a single director cannot claim it [6]. The allowance becomes available once a second person is paid above the Secondary Threshold, for example a business partner or an employed family member [9].
This is why the salary decision and the Employment Allowance question are inseparable. A company with two or more people paid above the Secondary Threshold can generally absorb the employer National Insurance on a £12,570 salary, while a single-director company often pitches the salary at the Secondary Threshold to avoid the charge entirely [9]. Businesses with a single director and no other staff sit closest to the one-person company position, where every pound of employer National Insurance is a real cost.
How dividend tax is calculated for the 2026-27 tax year
Dividend tax is worked out by stacking dividends on top of all other income. The dividends are treated as the top slice, so the rate that applies depends on how much of the income tax bands the salary and other income have already used [1].
The dividend rates for the 2026-27 tax year are set out below.
| Band | Dividend rate 2026-27 |
|---|---|
| Dividend allowance (first £500) | 0% |
| Basic rate (ordinary rate) | 10.75% |
| Higher rate (upper rate) | 35.75% |
| Additional rate | 39.35% |
The basic and higher rates each rose by 2 percentage points from 6 April 2026, confirmed at the Autumn 2025 Budget, while the additional rate and the £500 allowance were unchanged [1]. Dividend tax rates are set on a UK-wide basis, so Scottish taxpayers pay these same dividend rates even though their income tax bands differ [1].
A worked dividend example
Consider a director who takes a salary of £12,570, using the full Personal Allowance, and then draws £30,000 of dividends in the same tax year, with no other income. The salary carries no income tax and no employee National Insurance, because it equals the Personal Allowance and the Primary Threshold [5].
The first £500 of the dividends falls within the dividend allowance and is taxed at 0% [1]. The remaining £29,500 sits within the basic rate band, because total income of £42,570 stays below the £50,270 higher rate threshold, so it is taxed at the basic dividend rate of 10.75%, giving dividend tax of £3,171.25 for the year [1]. If the director had instead pushed total income above £50,270, the slice above that point would have been taxed at the 35.75% higher dividend rate [5].
The rules for paying a dividend legally
A dividend is not simply a transfer from the company bank account. Company law sets conditions, and a payment that ignores them can be an unlawful distribution that the director may have to repay.
The first condition is profit. A company must not pay out more in dividends than its available profits from current and previous financial years, measured after Corporation Tax [2]. A dividend paid when there is insufficient distributable profit is unlawful, regardless of what the bank balance shows.
The second condition is process. The company must hold a directors' meeting to declare the dividend and keep minutes of that meeting, even where there is only one director [2]. For each dividend the company must also produce a dividend voucher showing the date, the company name, the names of the shareholders being paid and the amount, with a copy kept for the company's records [2].
The third condition is fairness between shareholders. Dividends must usually be paid to all shareholders in proportion to their shareholdings, so a company cannot pay a dividend to one shareholder of a class and not another of the same class [2]. These steps are light in a one-person company but they are not optional, and the paperwork is what separates a lawful dividend from a disguised, taxable withdrawal.
The combined picture
Putting salary and dividends together shows why the mix is a planning exercise rather than a default. A salary reduces the company's Corporation Tax because it is deductible, but it brings National Insurance and, above the Personal Allowance, income tax [2]. A dividend avoids National Insurance entirely but comes from profit already taxed at the Corporation Tax rate and is then taxed again in the shareholder's hands at the dividend rates [3].
For a single-director company on a £12,570 salary plus £30,000 of dividends, the headline personal tax for the year is the £3,171.25 of dividend tax, alongside the £1,135.50 of employer National Insurance the company pays on the salary, with no employee National Insurance and no income tax on the salary itself [1]. Change any input, the company's profit, the director's other income, the availability of the Employment Allowance or the salary level, and the balance shifts. The salary side of that picture still has to be filed correctly through PAYE on every payrun, which is where HMRC-recognised payroll software carries the compliance load.
Size the salary and take-home picture
Before fixing a salary level, a director can model the salary side with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross salary and shows the employer National Insurance cost alongside the net pay.
£ per month
e.g. 1257L, S1257L, BR, D0
S = Scotland · C = Wales · W1/M1 = non-cumulative
Enter a salary or hourly rate above
About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
The salary-and-dividend mix exists because the UK taxes employment income and dividend income in two different ways, and owner-managed companies sit at the point where both regimes meet. A modest salary preserves benefit entitlement and uses the Personal Allowance, while dividends extract further profit without National Insurance, subject to the dividend rates and the legal steps a distribution requires.
The direction of travel has narrowed the gap. With the dividend basic and higher rates each up 2 percentage points from 6 April 2026 and employer National Insurance at 15%, the margin between taking profit as salary and taking it as dividends is tighter than it was. The arithmetic now rewards companies that model the full picture each year rather than repeating a fixed annual split, and that keep the payroll side filed cleanly while the dividend side follows company law to the letter.
Frequently asked questions
Is it better for a director to take salary or dividends?
There is no single answer, because the balance depends on the company's profit, the director's other income and whether the Employment Allowance is available. In broad terms a salary is deductible for the company and preserves benefit entitlement but attracts National Insurance, while dividends avoid National Insurance but come from profit already taxed at the Corporation Tax rate and are then taxed at the dividend rates of 10.75%, 35.75% or 39.35% for the 2026-27 tax year [1]. Most owner-managed companies model both each year rather than assuming one is always better [3].
How much can a director take in dividends before paying tax?
A shareholder receives a £500 dividend allowance each tax year, taxed at 0%, on top of any dividends covered by an unused Personal Allowance [1]. A director who has already used the £12,570 Personal Allowance against salary therefore pays dividend tax on dividends above the first £500, at the dividend rate that matches the band those dividends fall into once stacked on the salary [5].
Do dividends go through payroll?
No. A dividend is a distribution of profit to shareholders, not employment income, so it is not reported through PAYE or Real Time Information [2]. Only the salary side runs through payroll, where it must be filed on a Full Payment Submission on or before payday [8].
What makes a dividend unlawful?
A dividend is unlawful if the company does not have enough distributable profit to cover it, measured across current and previous financial years after Corporation Tax [2]. A dividend declared without the supporting directors' meeting, minutes and voucher, or paid unequally between shareholders of the same class, can also be challenged, and an unlawful dividend may have to be repaid to the company [2].
Image prompt for Imagen (also in frontmatter)
Documentary-style wide shot, a UK owner-managed company director at a tidy home-office desk reviewing a printed profit and loss statement and a payslip side by side, a calculator and a mug of tea on the desk, soft daylight from a sash window, late morning, muted palette of warm grey, oak, paper white, red-brick terraced houses visible through the window, off-centre composition with the subject in the right third, shot on a Leica Q3 at 28mm f/2.8, photojournalism, 35mm film grain, no AI artefacts, no warped hands, no warped text, landscape orientation 16:9.
