Salary vs Dividend Optimiser UK
Find the salary-and-dividend split that leaves a limited company director with the most after-tax money — and see why the popular “£9,100 salary” advice usually costs you money.
If you run your own limited company, how you split your income between salary and dividends decides your tax bill. The standard advice — “take a tiny £9,100 salary to avoid employer National Insurance, then dividends” — is usually the wrong answer. A higher salary of £12,570 typically leaves you better off, often by £1,400 to £1,650 a year on a £60,000 profit, because salary is deductible against Corporation Tax and uses more of your tax-free personal allowance — gains that outweigh the small employer NI it triggers. And if your company qualifies for the Employment Allowance, the £12,570 salary wins outright. This optimiser works out the after-tax take-home for any salary level at your company’s profit, finds the sweet spot, and shows why the cheapest-salary instinct often leaves money on the table. To compare being a company at all, use the Sole Trader vs Ltd Calculator; for the dividend tax detail, the Dividend Tax Calculator.
Company profit and extraction
Salary setting
Dividends and retained profit
Tax assumptions
Optimised result
Recommended salary
Calculating…
Calculating…
Personal take-home
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Dividends withdrawn
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Retained company profit
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Total tax estimate
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Corporation Tax
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Dividend tax
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Salary vs dividend — quick lookup
The left table shows the after-tax take-home from £60,000 of company profit at different salary levels — the rest paid as dividends. The right shows the optimal-salary take-home as profit rises. The headline finding is in the left table: the lowest salary is not the best one. The calculator finds the exact optimum for your profit and circumstances.
| Salary | Take-home | Total tax |
|---|---|---|
| £9,100 | £45,838 | £14,162 |
| £12,570 | £47,234 | £12,766 |
| £12,570 (EA) | £47,491 | £12,509 |
| £50,270 | £42,055 | £17,945 |
| Profit | Take-home | Total tax |
|---|---|---|
| £30,000 | £25,497 | £4,503 |
| £50,000 | £40,279 | £9,721 |
| £75,000 | £54,923 | £20,077 |
| £100,000 | £67,096 | £32,904 |
Left table is £60,000 company profit before salary, with the balance paid as dividends; “EA” means the company claims the Employment Allowance. Note the £50,270 salary row — taking a large salary is the worst option, dragging take-home down by over £5,000 versus the optimum, because of employee and employer NI plus higher-rate Income Tax. The sweet spot is a modest salary, large dividends.
How salary and dividends are taxed differently
The whole optimisation rests on the fact that salary and dividends are taxed on completely different machinery. Money taken as salary and money taken as dividends from the same profit reach your pocket having passed through different taxes. Understanding both sides is the only way to see why the optimum sits where it does.
The salary side — three taxes, but deductible
Salary attracts up to three charges, but carries one big advantage:
That deductibility is the key. Every pound of salary reduces the company’s taxable profit, so it saves Corporation Tax at 19–25%. Salary up to the personal allowance (£12,570) also pays no Income Tax and no employee NI, so the only cost of raising salary from £9,100 to £12,570 is a little employer NI — which is itself deductible. The Corporation Tax saving on that extra salary outweighs the employer NI, which is exactly why the higher salary wins.
The dividend side — lower rates, no NI, but not deductible
Dividends are paid from profit after Corporation Tax, and taxed more gently — but with no deduction:
Dividends avoid NI entirely and are taxed at lower rates than salary income, which is why most of a director’s income should come this way. But because they’re paid from post-Corporation-Tax profit, every pound of dividend has already been taxed at 19–25% before the dividend tax applies. The art of the split is using just enough salary to capture the personal allowance and Corporation Tax relief, then taking the rest as lower-taxed, NI-free dividends.
Worked examples
Four scenarios showing how the salary level and the Employment Allowance change the take-home — and why the extremes lose.
Scenario 1 · The “£9,100 salary” default
The popular advice, and what it costs
Total tax: £14,162 · Take-home: £45,838
The widely repeated tip is to take a £9,100 salary — just below the point where employer NI starts — and the rest as dividends. It avoids employer NI entirely, which sounds efficient. But it also forgoes £3,470 of tax-free, Corporation-Tax-deductible salary, leaving £45,838 take-home. As the next example shows, that instinct to dodge the employer NI actually leaves money behind.
Scenario 2 · The £12,570 salary
Why the higher salary wins
Total tax: £12,766 · Take-home: £47,234 (+£1,396)
Raising the salary to £12,570 — the full personal allowance — triggers about £479 of employer NI, but that extra salary pays no Income Tax or employee NI and saves Corporation Tax at 19%. The net effect is £1,396 more in your pocket than the £9,100 route. The employer NI is the small cost; the Corporation Tax relief and tax-free allowance are the larger gain. The “avoid employer NI” advice gets this backwards.
Scenario 3 · With the Employment Allowance
The £12,570 salary, costing nothing extra
Total tax: £12,509 · Take-home: £47,491 (+£1,653)
If your company qualifies for the Employment Allowance, it offsets the employer NI on that salary — so the £12,570 salary costs nothing extra and the case becomes overwhelming. Take-home rises to £47,491, £1,653 ahead of the £9,100 route. Many single-director companies don’t qualify for the allowance, but those with other employees usually do, making the higher salary a clear, free win.
Scenario 4 · The all-salary mistake
Why a big salary is the worst choice
Total tax: £17,945 · Take-home: £42,055 (−£5,179)
At the other extreme, taking most of the profit as salary is the worst outcome — £42,055 take-home, over £5,000 behind the optimum. A large salary stacks employer NI (13.8%), employee NI (8%), and higher-rate Income Tax (40%), where dividends would have been taxed far more gently with no NI. This is why the answer is never “just pay yourself a salary”: the dividend route is structurally cheaper for the bulk of the income.
Why £12,570 beats £9,100 — the optimisation, layer by layer
The “£9,100 to avoid employer NI” rule fixates on one cost and ignores three larger savings. Stepping the salary up from £9,100 to £12,570 sets off four effects — one cost, three gains — and the gains win. Here’s the chain that decides it:
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1
The cost — a little employer NI
Raising salary above £9,100 triggers employer NI at 13.8% on the excess. From £9,100 to £12,570, that’s about £479. This is the one cost the popular advice fixates on — and it’s the smallest number in the chain.
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2
Gain one — Corporation Tax relief on the salary
That extra £3,470 of salary and the £479 employer NI are both deductible against Corporation Tax, saving 19% of the total. That’s roughly £750 back — already more than the employer NI cost on its own.
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3
Gain two — the salary is tax-free to you
Salary up to £12,570 sits within the personal allowance: no Income Tax, no employee NI. You’re moving income from the dividend column (taxed at 8.75%+) into a column taxed at 0% in your hands. Pure efficiency.
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4
Gain three — less profit taxed twice as dividend
Every pound paid as salary is a pound not left in the company to be taxed at Corporation Tax and then again as a dividend. Shifting it to salary sidesteps that double layer on the margin.
£9,100 vs £12,570 salary — the net result
One small cost, three larger gains:
The arithmetic is decisive: the £479 of employer NI is dwarfed by roughly £750 of Corporation Tax relief plus the value of moving income into your tax-free allowance and out of the doubly-taxed dividend pool. The result is £1,396 more take-home — and £1,653 if the Employment Allowance wipes out the employer NI altogether. The “£9,100 salary” advice optimises the one small cost while ignoring three larger savings, which is how a well-meaning tip ends up leaving over a thousand pounds a year on the table. The right default for most directors is a salary at the personal allowance, not below it.
Where the optimum can move
The £12,570 salary is the right answer for most owner-directors, but a few situations shift it. If your company can’t use the Employment Allowance (common for sole single-director companies), the case is slightly narrower but the higher salary still wins on the numbers above. If you have other income using up your personal allowance, a lower salary may be better. And directors wanting to maximise pension contributions or maintain NI qualifying years may have reasons to set salary differently. The optimiser lets you test your own figures rather than relying on a rule of thumb — which, as the £9,100 myth shows, is exactly where the standard advice goes wrong.
Two scenarios that change the split
What if…
Your company can claim the Employment Allowance?
What if…
You took it all as salary instead?
Key salary and dividend terms explained
Optimising a director’s pay spans Income Tax, two kinds of National Insurance, Corporation Tax, and dividend tax. The ten terms below cover what you’ll meet setting your salary and dividends and talking to an accountant.
- Salary
- Pay you draw from your company as an employee/director. Deductible against Corporation Tax, and tax-free to you up to the personal allowance, but attracts National Insurance above certain thresholds.
- Dividend
- A payment to shareholders from post-Corporation-Tax profit. Taxed at lower rates than salary and free of National Insurance, but not deductible, so the underlying profit is already taxed once.
- Personal allowance
- The £12,570 of income you can earn tax-free each year. Setting salary to this level captures the full allowance with no Income Tax and no employee NI — the heart of the salary optimisation.
- Employer National Insurance
- NI the company pays on salary above the secondary threshold (£9,100), at 13.8%. The cost the “£9,100 salary” advice fixates on — but it’s deductible against Corporation Tax, which softens it considerably.
- Employee National Insurance
- NI you pay on your own salary, 8% between £12,570 and £50,270, then 2% above. Setting salary at the personal allowance avoids it entirely, since it starts at the same £12,570 threshold.
- Employment Allowance
- A relief that lets eligible companies offset a chunk of employer NI. Where it applies, it cancels the employer NI on a £12,570 salary, making the higher salary a free win. Many single-director companies don’t qualify.
- Corporation Tax
- Tax on company profit, 19% up to £50,000 rising to 25%. Because salary reduces taxable profit, every pound of salary saves Corporation Tax — the relief that makes a higher salary worthwhile.
- Dividend allowance
- The £500 of dividends you can receive tax-free each year. Small, but it’s the first slice of your dividend income that escapes the dividend rates entirely.
- Dividend tax rates
- The rates on dividends above the allowance — 8.75% basic, 33.75% higher, 39.35% additional. Lower than the equivalent salary Income Tax plus NI, which is why most director income should be dividends.
- Qualifying year (State Pension)
- A year that counts toward your State Pension. A salary at or above the Lower Earnings Limit secures one even with no NI actually paid — a reason not to set salary too low, beyond pure tax.
Five mistakes directors make with the split
The salary-dividend split is governed as much by myth as by maths. These five errors, drawn from the recurring r/UKPersonalFinance and r/SmallBusinessUK threads, are how directors overpay tax or trip a compliance problem.
Taking the £9,100 salary to “avoid employer NI”
The most common — and most costly — myth. Setting salary at £9,100 dodges employer NI but forgoes £3,470 of tax-free, Corporation-Tax-deductible salary. A £12,570 salary leaves you £1,400–£1,650 better off despite the small employer NI it triggers. The instinct to avoid one tax ignores three larger savings.
Cost: £1,400+ a year left on the table Fix: set salary at the £12,570 personal allowancePaying dividends the company hasn’t earned
Dividends can only come from post-tax retained profit. Paying a dividend the company doesn’t have the profit to cover is an unlawful dividend — it can be reclassified as salary or a director’s loan, triggering tax and penalties. Always check there’s sufficient distributable profit before declaring a dividend.
Cost: unlawful dividend, reclassified and taxed Fix: confirm distributable profit before payingSetting salary below the qualifying threshold
Chasing the lowest possible salary can drop it below the Lower Earnings Limit, meaning the year doesn’t count toward your State Pension. A salary at the personal allowance comfortably secures a qualifying year. Saving a few pounds of NI isn’t worth a gap in your pension record.
Cost: a missing State Pension qualifying year Fix: keep salary above the Lower Earnings LimitIgnoring the Employment Allowance eligibility
The Employment Allowance can cancel the employer NI on a £12,570 salary, but many single-director companies don’t qualify — you generally need at least one other employee paid above the threshold. Assuming you can claim it when you can’t, or missing it when you can, changes the optimal salary. Check your eligibility before setting pay.
Cost: a miscalculated optimum either way Fix: confirm Employment Allowance eligibilityForgetting other income in the calculation
The optimum assumes the company is your only income. If you have a second job, rental income, or a pension using up your personal allowance and basic-rate band, the ideal split shifts — a lower salary or fewer basic-rate dividends may be better. Always optimise on your total income, not the company in isolation.
Cost: dividends pushed into higher-rate tax Fix: factor in all your income sourcesFrequently asked questions
What is the most tax-efficient salary for a company director?
For most owner-directors it’s £12,570 — the full personal allowance — with the rest taken as dividends. This captures all your tax-free allowance, pays no Income Tax or employee NI, and the salary is deductible against Corporation Tax.
The popular advice to take just £9,100 (to avoid employer NI) usually leaves you £1,400 to £1,650 worse off, because the Corporation Tax relief and tax-free allowance on the higher salary outweigh the small employer NI it triggers. If your company can claim the Employment Allowance, £12,570 is even more clearly optimal.
Why is £12,570 better than a £9,100 salary?
Because the £9,100 advice fixates on one cost — employer NI — while ignoring three larger savings. Raising salary to £12,570 triggers about £479 of employer NI, but that’s outweighed by roughly £750 of Corporation Tax relief, plus the value of moving income into your tax-free allowance and out of the doubly-taxed dividend pool.
The net result is around £1,396 more take-home on £60,000 profit, or £1,653 if the Employment Allowance cancels the employer NI. The lowest salary isn’t the most efficient one — a salary at the personal allowance is.
Should I take more salary or more dividends?
For most directors: a modest salary at the personal allowance, then the bulk as dividends. Salary above £12,570 starts attracting employee NI (8%) and, higher up, 40% Income Tax, while dividends face no NI and lower rates.
Taking a large salary is usually the worst option — on £60,000 profit, an all-salary approach can leave you over £5,000 behind the optimised split. The dividend route is structurally cheaper for income above the personal allowance, which is why it should carry most of your pay.
Are dividends taxed less than salary?
Yes, in two ways. Dividends are taxed at 8.75%, 33.75%, or 39.35% — lower than the equivalent salary Income Tax rates — and crucially they carry no National Insurance, where salary attracts both employee and employer NI.
The trade-off is that dividends aren’t deductible: they come from profit already taxed at Corporation Tax. So the comparison isn’t dividends vs salary in isolation — it’s the combined effect of Corporation Tax plus dividend tax versus Income Tax plus NI, which is exactly what the optimiser works out.
What is the Employment Allowance and does it change my salary?
The Employment Allowance lets eligible companies offset a chunk of their employer National Insurance. Where it applies, it cancels the employer NI on a £12,570 salary, making the higher salary a clear free win — adding around £257 to take-home in our example.
The catch is eligibility: many single-director companies don’t qualify, as you generally need at least one other employee paid above the threshold. Check whether your company can claim it, because it shifts the optimal salary and the size of the benefit.
Can I pay myself dividends if the company has no profit?
No. Dividends can only be paid from distributable profit — profit remaining after Corporation Tax, including retained profit from previous years. Paying a dividend the company can’t cover is an unlawful dividend.
An unlawful dividend can be reclassified by HMRC as salary or a director’s loan, triggering tax and potential penalties. Always confirm there’s sufficient distributable profit before declaring a dividend, and keep proper board minutes and dividend vouchers as evidence.
Does a low salary affect my State Pension?
It can. To earn a qualifying year toward your State Pension, your salary generally needs to be at or above the Lower Earnings Limit. A salary at the £12,570 personal allowance comfortably secures this; setting salary too low in pursuit of tiny NI savings can create a gap.
This is another reason the rock-bottom salary isn’t optimal — protecting your pension record is worth more than a few pounds of saved National Insurance. The personal-allowance salary handles both the tax efficiency and the pension qualification.
Does other income change my optimal split?
Yes. The standard optimum assumes the company is your only income. If you have a second job, rental income, or a pension using up your personal allowance and basic-rate band, the ideal split shifts — you may want a lower salary, or fewer dividends in the basic-rate band before they’re taxed at the higher rate.
Always optimise on your total income, not the company alone. The calculator lets you account for your full picture, and for anything complex it’s worth confirming with an accountant. Free general guidance is at gov.uk.
Related calculators
The salary-dividend split connects to whether to be a company at all, the dividend and corporation tax behind it, and your wider take-home. These calculators handle each piece.
Methodology & sources
How the maths works
For each salary level, the optimiser deducts the salary and the employer National Insurance on it from company profit (both are allowable against Corporation Tax), applies Corporation Tax to what remains, then treats the post-tax profit as dividends. It calculates Income Tax and employee National Insurance on the salary, and dividend tax on the dividends after the dividend allowance, with dividends stacking on top of the salary through the tax bands. Take-home is the salary and dividends received minus all those taxes. Sweeping salary across the range finds the level that maximises take-home — typically the personal allowance.
These are illustrative comparisons to show how the split behaves. Real outcomes depend on your exact profit, Employment Allowance eligibility, other income, pension contributions, and the specific tax year’s rates and thresholds, all of which change. The aim is to reveal where the genuine optimum sits — and why it isn’t the lowest possible salary — not to replace tailored accountancy advice.
Assumptions and conventions used
- Salary and employer NI deductible against Corporation Tax
- Income Tax: 0% to £12,570, then 20% / 40% / 45%
- Employee NI: 8% £12,570–£50,270, 2% above
- Employer NI: 13.8% above £9,100 (offset by Employment Allowance if eligible)
- Corporation Tax: 19% to £50k, marginal relief to £250k, 25% above
- Dividend tax: 8.75% / 33.75% / 39.35% after the £500 allowance
- Company assumed to be the director’s only income unless stated
- Rates and thresholds shown are illustrative current UK figures