How this is calculated
Income tax is calculated by first applying your personal allowance, £12,570 for most people, though this tapers away by £1 for every £2 of income over £100,000, then taxing salary through the basic, higher and additional rate bands before adding dividends on top.
Dividends use their own rates once the £500 dividend allowance is used up: 10.8% within the basic rate band, 35.8% within the higher rate band, and 39.4% above the additional rate threshold, which is why the order income is stacked in matters for the final bill.
Employee National Insurance is calculated separately and only on salary, at 8% of earnings between the primary threshold and the upper earnings limit, and 2% above that, since National Insurance is not charged on dividend income.
Why salary and dividends are treated differently
Salary is a deductible expense for a company before corporation tax, but is subject to both income tax and National Insurance in the hands of the director or employee, whereas dividends are paid out of profits that have already suffered corporation tax and are then taxed again personally, but without National Insurance.
This is why many director-shareholders take a modest salary, often around the National Insurance threshold, and the rest of their income as dividends, since the combined tax and National Insurance cost of that mix is usually lower than an equivalent amount taken entirely as salary.
Using this alongside other calculators
This calculator gives the personal tax position on a given salary and dividend combination; the salary versus dividend calculator goes further by comparing different mixes of the two for a fixed amount of profit, including the corporation tax paid along the way.
If you have other income, such as rental profits or self-employment alongside employment, the combined tax calculator and other topic-specific calculators in this series model those situations directly.
What this means for your company
Treat the result as a planning figure for the 2026/27 tax year. If it changes what you were about to do, take a director's salary, a dividend, a large asset purchase or a filing decision, check it against your own accounts first. We can review the position with you and confirm the tax treatment before you commit.
Frequently asked questions
What is the personal allowance for 2026/27?
The standard personal allowance is £12,570, tax-free before any income tax applies, though it tapers away by £1 for every £2 of income over £100,000 and disappears entirely above £125,140.
How are dividends taxed differently from salary?
Dividends are taxed after salary using their own rates, currently 10.8%, 35.8% and 39.4% depending on the band, on top of a £500 dividend allowance, and are not subject to National Insurance at all.
Why do directors often take a low salary and high dividends?
Because National Insurance only applies to salary and dividend tax rates are generally lower than equivalent income tax rates, a modest salary combined with dividends usually produces a lower combined tax and National Insurance cost than the same amount taken entirely as salary.
Does this calculator include Scottish income tax rates?
No, this calculator uses the rest-of-UK income tax bands; Scotland has its own income tax rates and bands, set by the Scottish Parliament, which differ from those used here, particularly at the intermediate and higher levels.