How each one is taxed
Salary is a cost to the company, so it reduces the profit that corporation tax is charged on. But the company pays employer National Insurance of 15% on salary above £5,000 a year, and you pay income tax and employee National Insurance (8% from £12,570 to £50,270, then 2%).
Dividends come out of profit after corporation tax, at 19% to 25%. You pay dividend tax on them (10.75%, 35.75% or 39.35% in 2026/27), but no National Insurance.
So the question for each pound of profit is which route leaves more in your pocket once both the company’s and your own taxes are counted.
Why £12,570 usually wins
A salary of £12,570 is covered by your personal allowance, so there’s no income tax on it, and it’s exactly where employee NI starts. The company pays 15% employer NI on the £7,570 above £5,000, which is £1,135.50, but the salary saves corporation tax at 19% or more on the whole £12,570. The saving is bigger than the cost.
For a one-director company with £40,000 of profit before your pay, and no other income, our calculator gives these take-home figures for 2026/27:
| Salary | Take-home |
|---|---|
| £5,000 | £31,169.90 |
| £6,708 | £31,274.32 |
| £12,570 | £31,632.70 |
When £5,000 wins
If your total income lands between £100,000 and £125,140, you lose £1 of personal allowance for every £2 over £100,000. Then extra salary does double damage: it’s taxed itself and it takes allowance away. With £150,000 of profit, the figures turn round: £85,320.94 at a £5,000 salary, £85,273.30 at £6,708 and £85,109.80 at £12,570.
When a bigger salary wins
Employment Allowance takes up to £10,500 a year off a company’s employer NI bill, but a company whose only employee paid above the secondary threshold is a director can’t claim it. If someone else, such as a second director or an employee, is paid over £5,000, the company usually can. With the allowance covering the employer NI, a much larger salary can win: on £80,000 of profit, a salary of £75,000 comes out ahead.
A larger salary can also edge ahead when the profit is very high, or when the profit can’t cover a £12,570 salary at all. Our calculator tries every salary in £10 steps and shows a fourth option when that search beats the usual three.
Your state pension
A salary of at least £6,708 a year, the lower earnings limit for 2026/27, earns you a qualifying year for the state pension even though no National Insurance is paid until £12,570. Below that, the year doesn’t count from this job.
What this leaves out
The comparison assumes the company is your only income and that all the profit is paid out. It doesn’t cover associated companies, short accounting periods, pension contributions by the company, IR35 or director’s loans, all of which can change the answer. Speak to an accountant before you set your pay.