Why is £12,570 the standard director salary?

Three things line up at exactly the personal allowance. (1) You pay £0 income tax on the salary (it's all within the 0% band). (2) You pay £0 employee Class 1 NI (the threshold matches the PA in 2026/27). (3) The company gets corporation tax relief on the salary at 19% small-profits rate (or 25%/26.5% in higher bands), which is more valuable than the £1,135 of employer NI it costs (15% above £5,000). Net company saving versus paying £0 salary: about £1,250–£1,800 depending on your CT band, with no offsetting personal tax.

What about £5,000 (Secondary Threshold), when does that win?

Almost never on the maths, but it's worth understanding the logic. At £5,000 the company pays zero employer NI (15% × £0 above the threshold), but you also lose corporation tax relief on the £7,570 of salary you didn't pay yourself. That's £1,439 of CT at 19% the company doesn't get back. You then have to pay yourself that money as dividends, which costs you 10.75% dividend tax (£814) on top. So £5,000-strategy nets about £625 less per year than £12,570 at typical revenues. The case for it: paperwork simplicity (no ER NI to track) and not triggering RTI obligations as aggressively. Worth it for some semi-retired contractors with very low income; not worth it for full-time contractors.

What about £0 salary, all dividends?

Costs you about £1,800–£2,300/year vs the £12,570 strategy at typical revenues. You forfeit the personal allowance from being used against salary (some of it does flow to dividends, but dividend tax kicks in earlier when you don't use the PA against salary). You also break NI continuity, without a salary above the Lower Earnings Limit (£6,708 in 2026/27), the year doesn't count toward your State Pension. Almost no contractor should run £0 salary; it's mostly a comparison reference point.

Does this account for Employment Allowance?

No, because single-director limited companies with no other employees don't qualify for it. HMRC removed that loophole in April 2016. If you have a second employee, a spouse on payroll, an apprentice, anyone other than just you, your company can claim £10,500/year of Employment Allowance, which fully offsets the £1,135 of employer NI on a £12,570 director salary. We'll add an Employment Allowance toggle in a future iteration.

Why does corporation tax show 26.5% effective in some bands?

That's the marginal-relief band. Below £50,000 of profit, CT is 19% small-profits rate. Above £250,000, it's 25% main rate. Between £50,000 and £250,000 the effective rate climbs from 19% toward 25% via marginal relief, calculated as: main_tax − (£250,000 − profit) × 3/200. The marginal rate on each extra £1 of profit in that band is 26.5%, even though the effective average rate stays below 25%. Most contractor Ltds at £400–£700/day land squarely in this band.

What about pension contributions through the limited company?

Not yet modelled in v1, coming in Phase 3.5. Employer pension contributions are highly tax-efficient: the company pays them as a deductible expense (saves CT at 19–25%), they don't count as your salary or dividends (no income tax / NI / dividend tax), and they contribute toward your annual allowance (£60,000/year in 2026/27, less if tapered above £260k of adjusted income). For most contractors at £400+/day, an annual employer pension contribution of £20,000–£40,000 is more tax-efficient than taking the equivalent as dividends. Watch the wholly-and-exclusively rule and the annual allowance.

Can I keep money in the company to defer tax?

Yes, this is called retained earnings, and it's a legitimate strategy. Money kept in the company has only paid corporation tax, not dividend tax. You can distribute it later in a year when you have a lower personal income (gap between contracts, parental leave, partial retirement) and pay less dividend tax. Or wind down the company and extract it via a Members' Voluntary Liquidation, taxed as a capital gain (10% with Business Asset Disposal Relief, qualifying conditions apply). v1 of this calculator assumes max-dividend distribution; the retained-earnings lever is on the Phase 3.5 list.

What happens if HMRC says my contract was actually inside IR35?

You owe the back tax: roughly the difference between what you paid as salary+dividends and what you should have paid as deemed PAYE income, plus interest, plus penalties (10–30% of the underpayment for careless behaviour, up to 100% for deliberate concealment). For a £500/day contractor that's typically £5,000–£15,000 per year of disputed contract. IR35 insurance from Kingsbridge or Qdos costs £200–£500/year and covers investigation costs plus the tax bill itself. If your contract has any IR35 risk, the insurance is worth more than its premium.

Calculator

Outside IR35 Limited Company Calculator (2026/27)

The full Ltd money flow at your day rate: revenue → corporation tax → dividends → personal tax → take-home. Includes the salary strategy lever (£0 / £5,000 / £12,570) so you can see why £12,570 is the standard pick.

Reviewed 27 April 2026 · 2026/27 rates verified

Director's annual take-home

£69,129

£5,761/month · 62.8% of revenue retained · CT effective 22.5%

Show full breakdown

Money flow: company → director

Revenue (day rate × days)	£110,000.00
Director salary	−£12,570.00
Employer NI on salary15% above £5,000 secondary threshold	−£1,135.50
Accountancy fees	−£1,200.00
Other business expenses	−£500.00
Pre-tax profit	£94,594.50
Corporation taxEffective 22.5%	−£21,317.54
Distributable as dividends	£73,276.96
Dividend tax£500.00 dividend allowance applied	−£16,717.76
Net (salary + dividends after tax)	£69,129.20

Salary strategy comparison

Same revenue, three salary choices

Net annual to your pocket at £110,000 revenue.

Strategy	Net annual	vs best
£12,570 (PA)current	£69,129	—
£5,000 (ST)	£68,377	-£753
£0 salary	£67,525	-£1,604

For most contractors £12,570 wins because it uses the full personal allowance at zero income tax / employee NI. Above State Pension age the gap narrows because employee NI is already nil.

How the limited company route works

A limited company is a separate legal entity from you. It invoices the agency or end client, holds the money in its own bank account, pays its own tax (corporation tax), and then pays you, partly as a director's salary and partly as dividends out of post-tax profit.

Stage 1: company-side deductions

The company starts with revenue (your day rate × days worked, VAT-exclusive). Out of that come the deductible costs: your director salary, the employer NI on that salary (15% above £5,000 in 2026/27), accountancy fees, and any other wholly-and-exclusively business expenses (software, mileage, professional indemnity insurance, training, hardware). What remains is the company's pre-tax profit.

Stage 2: corporation tax

The company pays corporation tax on its pre-tax profit. Three bands apply in 2026/27: small-profits rate of 19% on profits up to £50,000; main rate of 25% on profits above £250,000; and a marginal-relief band in between where the effective rate climbs from 19% toward 25% (the marginal rate on each extra £1 of profit in that band is 26.5%). Most contractor Ltds at £400–£700/day land in the marginal-relief band.

Stage 3: dividends + personal tax

Post-corporation-tax profit is distributable as dividends. v1 of this calculator assumes you take all of it as dividends in the same year (the “max-dividend” strategy). You then pay personal tax on your combined salary + dividends: income tax + employee NI on the salary (often £0 + £0 at the £12,570 level) and dividend tax on the dividends after a £500 dividend allowance. Dividend rates in 2026/27: 10.75% basic, 35.75% higher, 39.35% additional.

Why the £12,570 director salary wins

At exactly the personal allowance the salary itself attracts zero income tax and zero employee Class 1 NI, but the company still gets corporation tax relief on the full £12,570 (worth £2,388 at 19% small-profits, £3,143 at 25% main). The cost is £1,135 of employer NI on the £7,570 above the secondary threshold. Net saving: roughly £1,250–£2,000/year depending on your CT band, with no offsetting personal tax because the salary lands entirely in your 0% band.

Worked example: £500/day, 220 days, £12,570 salary

Company side: £110,000 revenue − £12,570 salary − £1,135 ER NI − £1,200 accountancy − £500 other = £94,595 pre-tax profit. Corporation tax (marginal-relief band): £21,318. Distributable: £73,277.

Personal side: £12,570 salary + £73,277 dividends = £85,847 total income. Income tax on salary: £0 (within PA). Employee NI: £0. Dividend tax: £500 allowance then 10.75% × £37,200 + 35.75% × £35,577 = £16,718. Net to pocket: £69,129/year: about 62.8% of revenue retained.

For the line-by-line walkthrough of this scenario plus sensitivity to Scotland, student loans, and pension contributions, see our £500/day outside-IR35 worked example. For the high-rate version where the Ltd advantage shrinks due to PA-taper, see the £800/day worked example.

What this calculator doesn't cover

Pension contributions via the company: highly tax-efficient (employer contributions get CT relief and bypass personal tax / NI / dividend tax). Coming in Phase 3.5.
Retained earnings: leaving profit in the company to defer dividend tax to a lower-income year, or to extract via Members' Voluntary Liquidation later. v1 assumes max-dividend distribution.
Employment Allowance: single-director Ltds with no other employees don't qualify. If you have another employee on payroll your ER NI bill drops by up to £10,500.
VAT Flat Rate Scheme: for typical IT contractors at 14.5% sector rate, FRS adds about 1–2% to net retention vs standard VAT. Separate calculator coming in Phase 6.
IR35 status: assumes your contract is genuinely outside IR35. If HMRC determines otherwise, you owe the back tax plus penalties. Get IR35 insurance.
Associated companies / short accounting periods , the £50,000 / £250,000 corporation tax thresholds get divided across associated companies. Affects very few contractors.
Mid-year residence changes or salary changes , calculations assume one director salary all year, and one residence all year.

Frequently asked questions

Why is £12,570 the standard director salary?: Three things line up at exactly the personal allowance. (1) You pay £0 income tax on the salary (it's all within the 0% band). (2) You pay £0 employee Class 1 NI (the threshold matches the PA in 2026/27). (3) The company gets corporation tax relief on the salary at 19% small-profits rate (or 25%/26.5% in higher bands), which is more valuable than the £1,135 of employer NI it costs (15% above £5,000). Net company saving versus paying £0 salary: about £1,250–£1,800 depending on your CT band, with no offsetting personal tax.
What about £5,000 (Secondary Threshold), when does that win?: Almost never on the maths, but it's worth understanding the logic. At £5,000 the company pays zero employer NI (15% × £0 above the threshold), but you also lose corporation tax relief on the £7,570 of salary you didn't pay yourself. That's £1,439 of CT at 19% the company doesn't get back. You then have to pay yourself that money as dividends, which costs you 10.75% dividend tax (£814) on top. So £5,000-strategy nets about £625 less per year than £12,570 at typical revenues. The case for it: paperwork simplicity (no ER NI to track) and not triggering RTI obligations as aggressively. Worth it for some semi-retired contractors with very low income; not worth it for full-time contractors.
What about £0 salary, all dividends?: Costs you about £1,800–£2,300/year vs the £12,570 strategy at typical revenues. You forfeit the personal allowance from being used against salary (some of it does flow to dividends, but dividend tax kicks in earlier when you don't use the PA against salary). You also break NI continuity, without a salary above the Lower Earnings Limit (£6,708 in 2026/27), the year doesn't count toward your State Pension. Almost no contractor should run £0 salary; it's mostly a comparison reference point.
Does this account for Employment Allowance?: No, because single-director limited companies with no other employees don't qualify for it. HMRC removed that loophole in April 2016. If you have a second employee, a spouse on payroll, an apprentice, anyone other than just you, your company can claim £10,500/year of Employment Allowance, which fully offsets the £1,135 of employer NI on a £12,570 director salary. We'll add an Employment Allowance toggle in a future iteration.
Why does corporation tax show 26.5% effective in some bands?: That's the marginal-relief band. Below £50,000 of profit, CT is 19% small-profits rate. Above £250,000, it's 25% main rate. Between £50,000 and £250,000 the effective rate climbs from 19% toward 25% via marginal relief, calculated as: main_tax − (£250,000 − profit) × 3/200. The marginal rate on each extra £1 of profit in that band is 26.5%, even though the effective average rate stays below 25%. Most contractor Ltds at £400–£700/day land squarely in this band.
What about pension contributions through the limited company?: Not yet modelled in v1, coming in Phase 3.5. Employer pension contributions are highly tax-efficient: the company pays them as a deductible expense (saves CT at 19–25%), they don't count as your salary or dividends (no income tax / NI / dividend tax), and they contribute toward your annual allowance (£60,000/year in 2026/27, less if tapered above £260k of adjusted income). For most contractors at £400+/day, an annual employer pension contribution of £20,000–£40,000 is more tax-efficient than taking the equivalent as dividends. Watch the wholly-and-exclusively rule and the annual allowance.
Can I keep money in the company to defer tax?: Yes, this is called retained earnings, and it's a legitimate strategy. Money kept in the company has only paid corporation tax, not dividend tax. You can distribute it later in a year when you have a lower personal income (gap between contracts, parental leave, partial retirement) and pay less dividend tax. Or wind down the company and extract it via a Members' Voluntary Liquidation, taxed as a capital gain (10% with Business Asset Disposal Relief, qualifying conditions apply). v1 of this calculator assumes max-dividend distribution; the retained-earnings lever is on the Phase 3.5 list.
What happens if HMRC says my contract was actually inside IR35?: You owe the back tax: roughly the difference between what you paid as salary+dividends and what you should have paid as deemed PAYE income, plus interest, plus penalties (10–30% of the underpayment for careless behaviour, up to 100% for deliberate concealment). For a £500/day contractor that's typically £5,000–£15,000 per year of disputed contract. IR35 insurance from Kingsbridge or Qdos costs £200–£500/year and covers investigation costs plus the tax bill itself. If your contract has any IR35 risk, the insurance is worth more than its premium.

Related calculators

Umbrella vs Limited

Side-by-side comparison if you're still deciding.

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Dividend tax

Personal-side detail: salary + dividends → net, band by band.

Related guides

Setting up a limited company

Step-by-step from incorporation to first invoice; 1-2 week timeline, ~£2,000 year-1 cost.

What is IR35?

The three principal tests, the off-payroll regime, and what to do if HMRC says you're wrong.

VAT Flat Rate Scheme calculator

Required reading once your Ltd hits £90k turnover. Most service contractors fail the LCT test.

Reviewed: 27 April 2026 · See how we calculate · not financial advice.