Director Salary & Dividend Calculator (2025/26)
How it works
Limited company directors typically minimise tax by combining a small salary (to use the personal allowance and earn a State Pension credit) with dividends (no NI, lower headline rates). Corporation Tax is paid on profit before dividends. Then dividends are taxed personally after the £500 allowance.
Worked example
Sole director, £80k profit, £12,570 salary, no Employment Allowance.
- Employer NI: ~£1,135
- Corp tax (19%): ~£12,777
- Dividends: ~£53,517
- Dividend tax: ~£4,565
- Net to director: ~£60,387
Who should use this
- •Sole-director limited company contractors
- •Small business owner-managers
- •Directors with a spouse on the share register
- •Anyone restructuring from sole trader to Ltd
Common mistakes
- ×Paying salary above £12,570 unnecessarily (triggers 20% tax + 8% NI)
- ×Forgetting the £5k Employment Allowance needs more than one employee since 2020
- ×Declaring dividends without enough distributable reserves (illegal)
- ×Missing the £500 dividend allowance shrunk from £2,000
Frequently asked questions
Why £12,570 salary specifically?▾
It uses the full personal allowance with no Income Tax payable, while still earning a qualifying State Pension year via NI credit (you pay employee NI of about £20).
What is the Employment Allowance?▾
£5,000 off your Employer NI bill if you have more than one employee earning over the secondary threshold. Sole-director companies don't qualify.
Can I pay my spouse a salary?▾
Yes if they genuinely work for the business, paid at a reasonable rate. HMRC scrutinises 'paper' employment.
How are dividends taxed?▾
First £500 tax-free, then 8.75% (basic), 33.75% (higher), 39.35% (additional). Stacked on top of salary.
Should I use a pension instead of dividends?▾
Often yes for surplus profit — employer pension contributions are corp tax deductible AND tax-free for you (within Annual Allowance).
Do I need an accountant?▾
Strongly recommended for limited companies — annual accounts, CT600, payroll, dividend paperwork, and Companies House filings are all required.