Freelancers & IT Contractors

Contractor Salary & Dividends Calculator

Calculate the optimal split between salary and dividends for your Ltd Company. See exactly how Inside vs Outside IR35 impacts your final take-home pay.

Your Ltd Company

£
£
£

Paid directly from the Ltd Co into your pension (saves Corp Tax).

Total Personal Take-Home Pay

£56,383

Optimal Salary£12,570
Corporation Tax- £13,589
Dividends Taken£51,841
Dividend Tax- £8,028

💡 Why £12,570 salary?

We've automatically set your salary to £12,570. This perfectly uses up your tax-free Personal Allowance and qualifies you for State Pension credits, without triggering any Income Tax or Employee National Insurance.

How to optimise your Ltd Company tax (Outside IR35)

If you operate a Limited Company and your contracts fall Outside IR35, you have the freedom to decide how you pay yourself. The goal is to extract money from your company in the most tax-efficient way possible.

Step 1: Take a low salary

The standard advice from accountants is to pay yourself a salary up to the Primary Threshold for National Insurance, which is £12,570 a year (£1,047.50 a month).

  • You pay £0 in Income Tax (because it's within your Personal Allowance).
  • You pay £0 in Employee National Insurance.
  • It counts as a "qualifying year" towards your State Pension.
  • It is an allowable business expense, reducing your Corporation Tax bill.

Step 2: Take the rest in dividends

After taking your salary and paying your business expenses, whatever profit is left is subject to Corporation Tax (between 19% and 25%).

Once Corporation Tax is paid, you can extract the remaining profit as Dividends. Dividends are taxed at much lower rates than a normal salary:

  • The first £500 is completely tax-free (Dividend Allowance).
  • Dividends up to the £50,270 higher rate threshold are taxed at just 8.75%.
  • Dividends between £50,270 and £125,140 are taxed at 33.75%.
  • Dividends over £125,140 are taxed at 39.35%.

The Inside IR35 Nightmare

If HMRC or your client determines that your contract is Inside IR35, you are deemed an employee for tax purposes.

This destroys the salary/dividend model. Your entire day rate is subjected to standard PAYE tax. Worse, your "gross" day rate must also cover Employer costs (like Employer National Insurance and the Apprenticeship Levy) before you even see your personal gross salary.

This is why switching from Outside IR35 to Inside IR35 often results in a 20% to 30% drop in actual take-home pay.

The ultimate tax hack: Employer Pension Contributions

If you don't need all the cash immediately, the most tax-efficient thing you can do is have your Limited Company pay directly into your personal pension (a SIPP).

Employer pension contributions are a deductible business expense. This means they completely bypass Corporation Tax, bypass Income Tax, and bypass Dividend Tax. It is effectively "free money" extracted straight from your gross turnover into your retirement pot.

Frequently Asked Questions

What is the most tax-efficient director's salary in 2026/27?
For most Limited Company directors, the most tax-efficient salary is £12,570 a year (£1,047.50 a month). This fully utilizes your tax-free Personal Allowance and gives you a qualifying year for the State Pension, but keeps you below the threshold for paying Income Tax and Employee National Insurance.
How much is the dividend allowance in 2026/27?
The tax-free Dividend Allowance is £500 per year. Any dividends you take above this amount will be taxed at 8.75% (Basic Rate), 33.75% (Higher Rate), or 39.35% (Additional Rate).
What happens if my contract is Inside IR35?
If your contract is Inside IR35, you are treated as an employee for tax purposes. You cannot pay yourself in tax-efficient dividends. Your day rate will be subject to standard PAYE Income Tax and National Insurance, and your rate must also cover Employer National Insurance costs.