Salary vs Dividend Split Optimiser (2026/27)

How the optimiser works

What this optimiser doesn't cover

• Employment Allowance: if your Ltd has more than one employee on payroll (a spouse counts), you save up to £10,500/year of employer NI, which often shifts the optimum to £50,270 (top of basic-rate IT). Single-director Ltds don't qualify per the 2016 rule.
• Pension contributions: employer contributions are highly tax-efficient (CT relief, no personal tax). Coming Phase 3.5.
• Retained earnings: keeping profit in the company to defer dividend tax. v1 assumes max-dividend distribution.
• Other personal income: rental income, other employment, self-employed profits all use up your personal allowance and shift the optimum lower (since you'd be wasting PA on salary).
• Partial year: if you set up mid-year, the optimum is different (because thresholds aren't pro-rated for tax purposes, confusing area).
• Spousal split: if you and your spouse are both directors / shareholders, you can split dividends to equalise tax bands. This calculator assumes a single director / shareholder.
• State Pension qualification: earnings between £6,708 (LEL) and £12,570 (PT) count toward your State Pension without triggering any NI. The optimiser doesn't down-weight this; for most contractors £12,570 already covers it comfortably.

Frequently asked questions

Why is £12,570 usually the optimal salary?

It uses the full personal allowance at zero income tax and zero employee NI (the NI threshold matches the PA in 2026/27), while still giving the company corporation tax relief on the full £12,570 (worth £2,388 at 19% small-profits rate, £3,143 at 25% main rate). The cost is £1,135 of employer NI on the £7,570 above the secondary threshold. Net company saving versus £0 salary: £1,253 at 19% CT, £2,008 at 25%. There's no offsetting personal tax because the salary lands entirely in your 0% income tax band, it's the only salary level where you get full CT relief and zero personal tax simultaneously.

When does £12,570 stop being optimal?

Two main cases. (1) Above ~£250,000 of revenue, the optimum can shift to £5,000 (Secondary Threshold), at that revenue your total income is high enough that the personal allowance fully tapers, so the £12,570 salary becomes taxable at 20% IT, eating into its CT-relief advantage. The £5,000 ST avoids the £1,135 of employer NI entirely, and that saving outweighs the smaller CT relief you'd get from the higher salary. The gap is small (~£70/year at £300k revenue), so it's a marginal call. (2) Above State Pension Age, employee NI on the salary drops to zero, that removes one of the main reasons not to push the salary higher, and the optimum can land anywhere from £60k to £90k.

Why does the over-State-Pension-Age case change so much?

Below SPA, every pound of salary above £12,570 attracts 8% employee NI (or 2% above £50,270). That cost combines with income tax to make extra salary worse than dividends. Above SPA the EE NI drops to 0%, so each extra £1 of salary above the PA only costs 20% income tax (basic) or 40% (higher), and the company gets corporation tax relief at 19–26.5%. In the basic-rate IT band, the net cost of £1 of extra salary is around 20p IT + 15p ER NI − 26.5p CT relief = 8.5p, compared to 35.75p of dividend tax saved (higher-rate dividend). That's worth doing right up until the salary pushes total income toward the £100,000 PA-taper threshold, where the maths flips back.

What about Employment Allowance?

Employment Allowance gives qualifying employers up to £10,500/year off their employer NI bill. Single-director Ltds with no other employees DON'T qualify (HMRC removed that loophole in April 2016). If you have a second employee, a spouse on payroll, an apprentice, anyone other than just you, you DO qualify, which fully offsets the £1,135 of employer NI on a £12,570 salary, AND it removes the main reason not to pay yourself a higher salary. With Employment Allowance the optimum often shifts to £50,270 (top of basic rate). v1 of this calculator assumes no Employment Allowance, if you have it, run two scenarios: this calculator's recommendation, and £50,270, and pick the higher net.

Why doesn't the £6,708 Lower Earnings Limit appear as the optimum?

Because £6,708 doesn't beat £12,570 on the maths in any case we've found. People sometimes recommend £6,708 as the 'NI continuity threshold', earnings between the LEL and the Primary Threshold count toward your State Pension qualifying years without triggering any actual NI. So if you ONLY want to keep your State Pension qualification ticking, £6,708 is enough. But you're leaving £5,862 of personal allowance unused (worth £1,113 of corporation tax relief at 19%), so it's £1,000+ worse than the £12,570 strategy in net terms. The argument for £6,708 is administrative simplicity, not the maths.

Why does the dividend allowance only matter at low dividends?

The £500 dividend allowance is a fixed £500 nil-rate band, which translates to £53.75 of tax saved at the basic rate (10.75%), £178.75 at higher (35.75%), or £196.75 at additional (39.35%). It's a flat saving regardless of your salary choice, so it doesn't influence the optimal split, it just lifts everyone's net by a few hundred quid. The allowance has shrunk dramatically in recent years (£5,000 in 2017/18 → £2,000 → £1,000 → £500 today) and could keep shrinking; it's politically easy to cut.

Does retained earnings change the picture?

Yes, but the calculator doesn't model it. If you keep some profit in the company instead of distributing it, you defer the dividend tax to a later year. Useful if you expect lower personal income in a future year (gap between contracts, parental leave, partial retirement), you can take the dividend then at a lower rate. Or you can wind down the company eventually via a Members' Voluntary Liquidation, taxed as capital gains (10% with Business Asset Disposal Relief if eligible). Both options change the salary-vs-dividend trade-off because the dividend tax happens in a different year. Strategy is too situation-specific to encode here; speak to an accountant.

How is this different from the outside-IR35 Ltd calculator?

The outside-IR35 Ltd calculator (anchor #5) lets you pick a salary from a 4-way preset and see the resulting take-home. This calculator does the inverse: it sweeps every salary from £0 to £100k and tells you which one wins. Use this one when you want to find the optimum; use the outside-IR35 Ltd page when you've decided on a salary and want the full money flow. Both run on the same lib/tax/limited-company.ts module, so the numbers reconcile exactly when you plug in matching inputs.

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