Contractor Dividend Calculator

How a limited company turns contract income into pay

A contractor limited company has two separate pockets. The company earns the contract income; you are an employee and a shareholder of that company. Getting money from one pocket to the other is what the salary and dividend decision is about.

The order of events is fixed. Revenue comes in, allowable expenses go out, and the company pays you a salary. Both the salary and the employer's National Insurance on it are deducted from profit before corporation tax is worked out, which is why salary is called a deductible cost. What is left is profit before tax, and the company pays corporation tax on it. The remainder is distributable profit, and that is the only money that can legally be paid out as a dividend.

Dividends are not a business expense. They come out of profit after tax, they carry no National Insurance for either side, and they are taxed in your hands at dividend rates. That mix, no NIC and lower headline rates, is the whole reason contractors bother with the split.

One rule sits underneath all of it: a dividend can only be paid from distributable profits, and the company needs minutes and a dividend voucher for each payment. Paying yourself more than the company has earned creates an illegal dividend, which HMRC can reclassify as salary with the tax and NIC that follows.

The 2026/27 rates and thresholds behind the calculator

Every number in the tool comes from the table below. The personal allowance and the basic rate band have been frozen for several years, and the dividend allowance has fallen from £5,000 in 2017/18 to £500 today, so older contractor guides will give you the wrong answer.

The employment allowance is the one line that catches people out. It is worth £10,500 and would wipe out most of the employer NIC on a director's salary, but a company where the only employee is also the sole director cannot claim it. That single exclusion is why the £12,570 salary costs £1,135.50 rather than nothing.

Rates change at Budgets, and the calculator follows the 2026/27 figures above. Check the HMRC guidance on dividend tax and the corporation tax rates page before you file, because a rate change moves every line in the model.

Worked example: £100,000 of revenue and £5,000 of expenses

Take a contractor with £100,000 of invoices for the year and £5,000 of allowable expenses, which covers accountancy, software, insurance and travel. Profit before the director is paid is 100,000 - 5,000 = 95,000.

The salary is £12,570. Employer NIC at 15% applies to salary above £5,000, so 0.15 x 7,570 = 1,135.50. Deduct both from the £95,000 and profit before corporation tax is 95,000 - 12,570 - 1,135.50 = 81,294.50.

That profit sits in the marginal relief band, so the tax is not a flat 19% or 25%. It works out at £17,793.04, an effective rate of 21.89%. Take that off and the company has 81,294.50 - 17,793.04 = 63,501.46 to declare as dividends.

The dividend tax is worked out in slices. The first £500 is covered by the allowance. The next £37,700 fills the basic band at 8.75%, which is 37,700 x 8.75% = 3,298.75. The remaining £25,301.46 falls in the higher band at 33.75%, which is 25,301.46 x 33.75% = 8,539.24. Total dividend tax is £11,837.99.

Net pay is the salary plus the dividend minus that tax: 12,570 + 63,501.46 - 11,837.99 = 64,233.47. On £100,000 of revenue, you keep 64.2%. The tax and NIC paid across the company and you come to £30,766.53, or 32.4% of the £95,000 profit.

Why £12,570 is the usual director salary

The standard advice is to set the director's salary at the personal allowance, £12,570, and take the rest as dividends. The reasoning is easy to follow.

A salary up to £12,570 uses the personal allowance, so no income tax is paid on it. Employee NIC starts at the same £12,570, so no employee NIC is paid either. The salary and the employer NIC are both deductible for corporation tax, which means the company gets relief at its marginal rate on the wage bill. And the salary is high enough to keep a qualifying year on your National Insurance record for the state pension.

The cost is the employer NIC. Above £5,000, every £1 of salary carries 15p of employer NIC, so the £7,570 between the threshold and the personal allowance adds £1,135.50 to the company's bill. Set against that, each £1 of salary saves 19p to 26.5p of corporation tax, so the slice is close to cost neutral in pure tax terms. It stays popular because it is simple, it builds the NI record, and it keeps the dividend small enough to stay in the basic band for many contractors.

A higher salary can still be the right call. Lenders count salary rather than dividends for a mortgage, pension contributions are capped by salary, and a salary above the personal allowance may suit someone with gaps in their NI record. Run your own numbers in the calculator rather than copying a rule of thumb.

Corporation tax: 19%, 25% and the 26.5% band in between

Corporation tax has three zones. Profits of £50,000 or less pay 19%. Profits of £250,000 or more pay 25%. Between the two, marginal relief tapers the rate so that the effective rate climbs smoothly from 19% to 25%.

The formula for the middle zone is short: tax is 25% of profit minus 1.5% of the gap between £250,000 and your profit. Written as an equation, marginal relief = 0.015 x (250,000 - profit). At £81,294.50 of profit the relief is 0.015 x 168,705.50 = 2,530.58, and 25% of £81,294.50 is £20,323.63, leaving £17,793.04.

The practical way to remember the middle zone is the marginal rate: each extra £1 of profit between £50,000 and £250,000 bears 26.5p of corporation tax. That is higher than the 25% large company rate, which surprises people who assume the band is a discount.

Two details change the arithmetic for some companies. If the company has associated companies, the £50,000 and £250,000 limits are divided between them, so a contractor with a second trading company can fall into the marginal band at much lower profit. And the tax is due nine months and one day after the accounting year end, with quarterly instalments once profits are large enough.

Dividend tax: the £500 allowance and three rates

Dividends are taxed as the top slice of your income. Salary fills the bands first, then dividends stack on top, which is why a £12,570 salary leaves the whole basic band free for dividends.

The first £500 of dividends is covered by the dividend allowance and taxed at 0%. The allowance is not a tax-free amount in the usual sense: it still uses up £500 of whichever band the dividend falls into, so it can push other income into a higher rate. Above it, dividends are taxed at 8.75% inside the basic band, 33.75% in the higher band, and 39.35% above £125,140.

Read the table as a stack. The £500 allowance sits at the bottom, then £37,700 of basic band, then the remainder in the higher band. The total of £11,837.99 is what self assessment will ask for on the dividend, and it is due by 31 January after the tax year ends.

Because the allowance consumes band space, adding £500 of dividends at the top of the basic band can cost more than the 8.75% headline suggests, and a dividend that crosses into the higher band drags the whole slice above the line to 33.75%. That is worth checking before you declare a round number at the end of the tax year.

Dividends versus 100% salary on the same £95,000

The comparison people want is what happens if the company pays everything out as salary. It cannot pay £95,000, because employer NIC comes out of the same pot. The salary that uses up £95,000 including employer NIC solves to 83,260.87 + 11,739.13 = 95,000, so the salary is £83,260.87 and the employer NIC is £11,739.13.

The salary route loses £20,736.35 to income tax and £3,675.82 to employee NIC. The split route loses £17,793.04 to corporation tax and £11,837.99 to dividend tax, with only £1,135.50 of employer NIC. The total tax bill is lower by about £5,385, which is the dividend advantage in this example.

The advantage is real but not free. Dividends depend on profit, so a quiet quarter means a smaller dividend. Mortgage lenders usually want two to three years of SA302s and often weight salary more heavily. Pension contributions are limited by salary, and there are no employment rights or employer pension contribution on dividend income. Inside IR35 contracts, the deemed employment rules can remove the split altogether.

The gap also shrinks as profit rises. At £250,000 of profit the corporation tax rate reaches 25%, and the combined tax on a dividend in the higher band is close to the PAYE equivalent. The HMRC marginal relief guidance sets out the mechanics, and the Finance Act 2024 is the statute behind the current dividend rates.

What the calculator leaves out

The model covers salary, employer NIC, corporation tax, dividends and dividend tax for a single director with no other income. That is the common case, and it is not the whole picture.

Other income. A second job, a rental property or a pension in payment changes the band your dividends land in. Add that income to the salary field if you want a rough answer, or run the dividend slice by hand.

Student loans. Plan 1, Plan 2, Plan 4 and postgraduate loans are charged on income above the threshold, and dividends count toward the total. The calculator does not deduct them.

Pensions. An employer pension contribution is deductible for corporation tax and is not subject to NIC, which often beats taking the money as a dividend. Personal contributions are capped by relevant earnings, and dividends are not relevant earnings.

VAT and expenses. VAT collected is not revenue, and only allowable expenses belong in the expenses box. Mileage, home office claims and equipment each have their own rules.

Timing and payments on account. Dividend tax is paid through self assessment, with payments on account due in January and July once the bill is large enough. Scottish and Welsh income tax apply to salary, not to dividends, and a company with associated companies has different corporation tax limits.

Other countries. A US C corporation pays federal tax at 21%, then shareholders pay 0%, 15% or 20% on qualified dividends, with no National Insurance at either stage. The IRS guide to investment income sets out those rules. Everything on this page is UK only.

None of this is tax advice. It is a model of the rules, built so you can see how each lever moves the answer before you talk to an accountant.