WageSalary vs Dividend 2026-27
Company directors who can choose how to draw money from their business weigh salary against dividends because the two are taxed in very different ways. Salary carries income tax and National Insurance but is a deductible cost for the company; dividends carry no National Insurance but are paid out of profit the company has already paid corporation tax on, and are taxed in your hands at 10.75%, 35.75% or 39.35% above the £500 allowance. This page explains the mechanics of that trade-off - it does not tell you what to pay yourself.
Dividend tax calculator
| Income tax on salary | £0 |
| National Insurance | £0 |
| Dividends @ 0% (allowance) | £0 |
| Dividends @ 10.75% | £3,999 |
| Dividends @ 35.75% | £822 |
| Total dividend tax | £4,821 |
The £500 dividend allowance is tax-free but still uses band capacity. Dividends are taxed on top of your other income at 10.75% / 35.75% / 39.35% depending on the band they fall in. Estimates, not advice.
How salary is taxed
A salary is subject to income tax and to National Insurance for both the employee and the employer. Those are real costs on the pay itself, and NI in particular has no equivalent on dividends.
Against that, salary is a business expense. The company deducts it before working out its profit, so paying a salary reduces the amount of corporation tax the company pays. Salary also counts as earnings for things like pension contributions and certain benefits.
How dividends are taxed
Dividends are paid out of company profit after corporation tax has been charged, so unlike salary they are not deductible for the company. The profit has already been taxed at the company level before it reaches you.
In your hands, dividends carry no National Insurance. After the £500 allowance they are taxed at 10.75%, 35.75% or 39.35%, depending on the band they fall into once stacked on your other income. The absence of NI is the main attraction; the fact that dividends come from post-corporation-tax profit is the offsetting cost.
The trade-off directors weigh
The decision comes down to comparing two combined tax positions. Salary is taxed once, through income tax and NI, but lowers the company's corporation tax. Dividends escape NI but are taxed twice in effect - corporation tax at the company level, then dividend tax at your personal rate.
Which combination costs less depends on the specific rates, allowances and profit involved, and it shifts whenever those figures change - as the 2026-27 rise in dividend rates shows. This page sets out the mechanics so you can see the levers; it gives no personal recommendation, and the right mix for any individual is a matter for their own circumstances and an accountant.
Frequently asked questions
Why do dividends avoid National Insurance?
Dividends are a distribution of company profit rather than earnings, so no National Insurance applies to them. They are instead taxed at 10.75%, 35.75% or 39.35% above the £500 allowance.
If dividends have no NI, are they always cheaper than salary?
Not necessarily. Dividends come from profit already taxed by corporation tax and are not deductible for the company, while salary reduces corporation tax. The overall cost depends on the rates and figures involved, which is why directors compare the two positions.
General information, not advice. Estimates assume the standard 1257L tax code and typical circumstances; your payslip may differ by a pound or two because HMRC payroll software truncates at each step. Verify with HMRC or an accountant for any decision. WageReckon stores no salary data - the calculators run in your browser.
Sources
Rates for the 2026-27 tax year, current as of 24 July 2026. Source: HMRC (gov.uk). Contains public sector information licensed under the Open Government Licence v3.0. Source: HMRC / gov.uk. See how we calculate.