If you run your own limited company, you are likely to pay yourself a salary and draw down any retained profits as dividends.
Use our embedded MS Excel calculator to work out how much tax you will incur on any combination of salary and dividends.
Enter your salary/dividend amounts into the yellow boxes below, and simply refresh the page if you make a mistake.
Scroll down for some further advice on choosing the most tax-efficient salary, plus some explanatory notes.
Limited company dividend calculator for 21-22 tax year
- There is a Dividend Allowance which applies to the first £2,000 of dividend income. This is reflected in the ‘Your Total Taxable Income’ cell in the calculator.
- The tax rates used in the calculator apply to England and Wales.
- We have excluded the Employment Allowance from the calculator for simplicity (see below).
How are salary and dividends taxed?
Salaries incur income tax, employers’ and employees’ NICs – which are all collected via the PAYE payroll process.
The personal allowance for 2021/2 is £12,570. Assuming you are eligible to receive the full amount, there is no income due on salaries paid up to this threshold.
Class 1 Employers’ NICs – 13.8% on income over £8,840.
Class 2 Employees’ NICs – 12% on income over £9,568, and 2% over £50,270.
Dividends incur dividend tax – which is levied according to the tax band you sit within. This is collected via the annual self-assessment process.
What is the most tax-efficient salary for 2021/22?
To work out the most tax-efficient salary to pay yourself during 2021/2, you need to be aware of the various income tax and National Insurance thresholds listed above.
Ultimately, the most tax-efficient salary depends on whether or not your company is eligible to use the Employment Allowance, which refunds the costs of up to £4,000 of Employers’ NICs each tax year. You are unlikely to be eligible if you’re a sole director. Find out more here.
The most tax-efficient salary levels are:
£8,840 (if you cannot claim the EA) – no income tax or National Insurance Contributions are applicable, but you still qualify for the state pension. This is likely to be the optimum salary for most limited company contractors.
£12,570 (if you can claim the EA) – employers’ NICs are refunded, there is no income tax, and the employee’s NICs you are liable for are offset by the Corporation Tax savings you make by paying yourself a higher salary.
Dividends – further considerations
You must only ever distribute dividends if there are sufficient retained profits in your company accounts. If you overpay dividends they could potentially be classed as ‘ultra vires’ (illegal), incurring the wrath of both HMRC and your accountant.
Most businesses now use online accounting software, such as FreeAgent and Xero. Assuming you have kept your accounts up-to-date, and reconciled with your bank account, you should have a precise indicator of the amount of dividends you can legitimately draw down from your company at any one time.
If in any doubt whatsoever, ask your accountant.