A contractor's limited company is taxed twice on the way to your bank account and a calculator that shows only one of them is not a calculator. First the COMPANY pays Corporation Tax on its profit, at the 19% small profits rate on £50,000 or less. Then YOU pay dividend tax on what it distributes, at 10.75% in the basic band for 2026/27 after a £500 allowance. On £55,000 of turnover with a £12,570 salary and £2,000 of expenses, that is £7,465.96 of Corporation Tax and £3,367.82 of dividend tax, leaving £41,030.73.
The four deductions, in the order they happen
Salary out of the company first: £12,570 pays no Income Tax and no employee National Insurance, because both thresholds sit there, but it does carry £1,135.50 of employer National Insurance at 15% of the £7,570 above the £5,000 secondary threshold, and a company whose only employee is its director cannot claim the Employment Allowance against it. Then genuine business expenses. What remains is profit: £39,294.50 on £55,000. Corporation Tax at 19% takes £7,465.96, leaving £31,828.55 distributable. Dividend tax on that, after the £500 allowance, takes £3,367.82 at the 10.75% basic rate. The director keeps £41,030.73.
Why the salary stops where it does
Taking £12,570 rather than £5,000 costs the company £1,135.50 of employer National Insurance and saves £1,654.05 of Corporation Tax on the salary and the NI together, so the extra £7,570 reaches you for a net company cost of about £5,916. The same company money taken as a dividend instead would arrive as about £6,293 after Corporation Tax and 10.75% dividend tax. The two are close, which is why the answer moved this year: the 2026/27 dividend rates rose to 10.75% basic and 35.75% higher, narrowing the old dividend advantage. Run your own numbers rather than copying a rule of thumb written for an earlier year.
Where a calculator usually goes wrong
Four places. It forgets employer National Insurance on the director's salary, which is real money and is the reason £12,570 is not free. It uses last year's dividend rates, which changed for 2026/27. It ignores the £50,000 small profits limit, above which marginal relief applies on the way to the 25% main rate, so a £70,000 profit is not taxed at 19% throughout. And it treats the whole turnover as distributable, forgetting that money paid out as a dividend must come from post-tax PROFIT, not from cash in the account: a company can be solvent and still have no lawful dividend to pay.
The lever that beats both routes
An employer pension contribution from the company. It is deductible for Corporation Tax, carries no National Insurance on either side, and is not dividend income, so it moves money to you without passing through either of the two taxes above. Within the annual allowance it is the most efficient thing a contractor company does, and it is the reason a comparison of salary against dividends is often the wrong question. It is also money you cannot reach until pension age, which is the real trade rather than a tax one.
What this page assumes
The 2026/27 tax year, England, Wales or Northern Ireland, a single-director company outside IR35, a £12,570 salary, £2,000 of allowable expenses, no VAT flat-rate benefit, no pension contribution, no other income and profit under the £50,000 small profits limit. Inside IR35 none of it applies: the fee-payer deducts Income Tax and National Insurance before the fee reaches your company, so there is no profit to tax and no dividend to declare, and the company adds administration rather than take-home.
Questions people ask about limited company tax calculator
How much tax does a limited company pay?
Corporation Tax at 19% on profits of £50,000 or less, and 25% above £250,000 with marginal relief between. On £39,294.50 of profit that is £7,465.96, before any dividend tax the director then pays.
What is the best director's salary in 2026/27?
Usually the Personal Allowance, £12,570, which carries no Income Tax and no employee National Insurance. It does carry £1,135.50 of employer National Insurance, and the Corporation Tax relief on salary plus NI slightly more than covers it.
How much dividend tax will I pay?
Nothing on the first £500. Then 10.75% in the basic band, 35.75% in the higher band and 39.35% above that, for 2026/27. On £31,828.55 of dividends alongside a £12,570 salary, £3,367.82.
Does this work inside IR35?
No. Inside IR35 the fee-payer deducts PAYE before paying your company, so there is no profit to tax and nothing to distribute. The comparison worth making there is between agency PAYE and an umbrella.