How this is calculated
For each salary option, employer National Insurance is deducted from company profit first, since it is a company cost. Corporation tax is then charged on what is left, using the 2026/27 rates of 19% up to £50,000 and 25% above £250,000 with marginal relief between those figures.
The profit remaining after corporation tax is treated as fully distributed as dividends. Personal tax is calculated on the salary and dividends together, since dividends are taxed on top of other income, using the 2026/27 personal allowance, income tax bands and the 10.75%, 35.75% and 39.35% dividend rates with the £500 dividend allowance.
The two options are compared purely on net income after all company and personal tax, so the 'better' answer reflects only the tax outcome for the figures entered, not any wider commercial reason for choosing a particular salary.
Why salary level matters
A salary at or just above the National Insurance secondary threshold usually secures a qualifying year for the state pension while keeping employer NIC low or nil (subject to Employment Allowance eligibility), and the salary itself is a deductible cost that reduces corporation tax.
Pushing salary higher trades a modest NIC cost for a bigger corporation tax deduction, and the right balance shifts depending on whether the company profit sits in the 19% band, the marginal relief band, or the full 25% band, which is exactly why comparing two concrete options side by side is more reliable than a single rule of thumb.
Other factors worth considering
This calculator looks at one tax year in isolation. Directors extracting profit steadily over several years, or planning around dividend allowance use by multiple shareholders, may get a better lifetime result from a different mix than the single best year shown here.
Pension contributions made directly by the company are usually more efficient than paying out further salary or dividends once basic needs are met, since they reduce corporation tax without triggering personal tax at the point of contribution.
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
Why compare only two salary levels instead of finding one optimum figure?
Salary decisions usually come down to a small number of realistic options, often the NIC threshold or the personal allowance, so comparing named options side by side is more useful in practice than an abstract optimum that ignores round-figure payroll setup.
Does this include the Employment Allowance?
No, the Employment Allowance is excluded here because most single-director companies with no other employees cannot claim it; if you employ someone else it may reduce employer NIC further and should be factored in separately.
Should every director take the same salary?
Not necessarily. The right salary depends on the individual's other income, whether they need a qualifying year for state pension, and the company's overall profit level, so each director's position should be checked separately.
Does this account for multiple shareholders?
No, it assumes a single director-shareholder receiving all the dividends. With multiple shareholders, dividends are usually split by shareholding, which can materially change the personal tax outcome for each individual.