Employer and Director Tax Planning: The Complete 2026/27 Guide

Running a limited company or employing staff brings a set of tax questions that go well beyond a standard salary calculation: what does an employee actually cost once National Insurance and pension contributions are added? How much Corporation Tax will your company pay? And if you are a director, should you pay yourself in salary, dividends, or a mix of both? This guide answers each of these questions with worked examples for the 2026/27 tax year, and links to free calculators for your own figures.

Employer National Insurance explained

Every UK employer pays Class 1 secondary National Insurance on top of the salaries they pay — a cost that is entirely separate from what comes out of the employee’s own pay. For 2026/27, employer NI is charged at 15% on earnings above the £5,000 secondary threshold, with no upper limit.

On a £35,000 salary, that works out as 15% of £30,000 (the amount above the £5,000 threshold), giving £4,500 per year in employer NI — a cost the business bears in addition to the salary itself.

Many small employers can reduce or eliminate this bill using the Employment Allowance, which lets eligible businesses deduct up to £10,500 per year from their total employer NI liability (applied once across the whole payroll, not per employee). Most small employers qualify, with the notable exception of companies where the only employee is also a director. Our Employer NI Calculator lets you enter any salary and see the exact NI cost, with and without Employment Allowance applied.

The true cost of employing someone

The salary you offer in a job advert is only part of what hiring someone actually costs. On top of gross salary, employers typically add:

Cost	Typical rate
Employer National Insurance	15% above £5,000/year
Workplace pension (auto-enrolment minimum)	3% of qualifying earnings
Benefits (if offered)	Varies — healthcare, equipment, etc.

As a rough guide, budget for 12–20% above gross salary as the real cost of employing someone, once National Insurance, pension contributions, and Employment Allowance (if eligible) are all factored in. For a £35,000 salary with a 3% pension contribution and no other benefits, the total annual cost typically lands somewhere between £39,000 and £40,500 depending on whether Employment Allowance applies.

This figure matters enormously when budgeting for a new hire, pricing services if you bill based on staff costs, or comparing the affordability of bringing someone on payroll versus outsourcing to a contractor. Our Employer Cost Calculator gives you the full breakdown for any salary and pension contribution level.

Corporation Tax and Marginal Relief

UK limited companies pay Corporation Tax on their profits, and the rate depends on how much profit the company makes:

Profit band	Rate
Up to £50,000	19% (Small Profits Rate)
£50,001 – £250,000	Marginal Relief (effective 19–25%)
Over £250,000	25% (Main Rate)

Marginal Relief exists to smooth the jump between the 19% and 25% rates for companies with profits between £50,000 and £250,000, rather than a sudden cliff-edge increase. The formula uses a standard fraction (3/200) applied to the difference between your profit and £250,000. On £100,000 profit, for example, the effective Corporation Tax rate works out at around 19.4% once Marginal Relief is applied — far closer to the small companies rate than the headline 25% main rate might suggest.

If your company has associated companies (under common control), the £50,000 and £250,000 thresholds are divided by the total number of associated companies, which can push a group of smaller companies into higher effective rates sooner than a single standalone company. Our Corporation Tax Calculator handles the Marginal Relief calculation automatically, including adjusting for associated companies.

Director salary vs dividends: which is more tax-efficient?

This is one of the most common tax planning questions for anyone running their own limited company. Salary and dividends are taxed completely differently:

• Salary is a deductible business expense (it reduces the profit your company pays Corporation Tax on), but is subject to Income Tax and both employee and employer National Insurance
• Dividends are paid from post-tax profit (so they don’t reduce your Corporation Tax bill), but have no National Insurance at all and lower Income Tax rates — 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate

The commonly used strategy among UK company directors is to pay a small salary — often set at exactly the £12,570 Personal Allowance — and take the remainder of their income as dividends. This approach uses up the tax-free Personal Allowance, may help build qualifying years towards the State Pension, and keeps National Insurance minimal, while dividends above the £500 tax-free Dividend Allowance are taxed at rates significantly lower than equivalent salary once combined tax and NI are considered.

For example, extracting £50,000 from a company as a £12,570 salary plus £37,430 in dividends results in total personal tax of roughly £3,200 — substantially less than the equivalent tax and NI bill on a £50,000 salary alone. Our Director Salary vs Dividend Calculator lets you enter your target extraction amount and see the tax breakdown, take-home figure, and Corporation Tax saving for any salary/dividend split you choose.

All National Insurance classes in one place

National Insurance is charged differently depending on whether you are an employee, an employer, or self-employed, and it’s easy to get the classes confused:

Class	Who pays	2026/27 rate
Class 1 (Employee)	Employed workers	8% on £12,570–£50,270, 2% above
Class 1 (Employer)	Employers	15% above £5,000
Class 2	Self-employed	Abolished from April 2024
Class 4	Self-employed	9% on £12,570–£50,270, 2% above

Notably, dividends are not subject to National Insurance at all — only Income Tax at dividend rates — which is the core reason the salary/dividend split matters so much for company directors. Our standalone National Insurance Calculator lets you toggle between employee, employer, and self-employed to see the exact NI due in each case, without needing to remember which threshold and rate applies to which situation.

Comparing the total tax burden at different profit levels

It helps to see how these calculations interact at different company sizes. Here is an indicative comparison for a single-director company at three different profit levels, assuming a £12,570 salary and the remainder taken as dividends after Corporation Tax:

Company profit	Corporation Tax rate	Approx. total tax (company + personal)
£40,000	19% (Small Profits Rate)	Lower effective rate overall, most profit extracted at basic dividend rate
£100,000	~19.4% (Marginal Relief)	Some dividends taxed at higher rate once salary and dividend income combine
£300,000	25% (Main Rate)	Higher combined tax burden; more of the dividend income falls into higher/additional rate bands

This is why company directors with growing profits often explore additional planning options such as pension contributions (which reduce both Corporation Tax and personal tax exposure), timing dividend payments across tax years to manage which rate band they fall into, or reinvesting profit in the business rather than extracting it all in a single year. These are decisions best made with a qualified accountant, but understanding the underlying mechanics — salary cost, Corporation Tax, and dividend tax — helps you have a more informed conversation about the options.

Planning across the tax year, not just at year-end

A common mistake among small business owners is treating tax planning as a once-a-year task done just before the accounting deadline. In practice, several of the decisions covered in this guide are much easier to manage if reviewed quarterly rather than left until the last minute:

• Salary reviews: if you take on new staff partway through the year, recalculate your Employment Allowance usage — it’s a fixed annual amount, not a rolling one, so timing matters if you’re close to the £10,500 limit
• Corporation Tax estimates: checking your Marginal Relief position partway through the accounting year helps you set aside the right amount rather than being surprised by the bill
• Dividend timing: if your personal income varies year to year, timing larger dividend payments for a lower-income year can reduce the rate at which they’re taxed
• Pension contributions: employer pension contributions are also a deductible business expense and can be a tax-efficient way to extract value from the company without triggering personal Income Tax at all

None of this replaces proper accounting advice, but running the numbers yourself throughout the year using free calculators means you walk into conversations with your accountant already understanding the shape of your tax position, rather than hearing the figures for the first time when the bill arrives.

Putting it together: a small company example

Consider a one-person consultancy generating £120,000 in annual revenue with £10,000 of business expenses, leaving £110,000 in pre-tax profit. The director pays themselves a £12,570 salary (costing the company £12,570 plus a small amount of employer NI once Employment Allowance is applied) and takes the remaining profit as dividends after Corporation Tax. Using the Marginal Relief band, the company pays Corporation Tax on its profit after the salary deduction, then the director pays personal tax on the dividends received. Modelling this full chain — company profit, Corporation Tax, then personal dividend tax — is exactly what the calculators in this guide are built to do together, giving a realistic picture of total tax paid across both the company and the individual, rather than looking at either side in isolation.

Common mistakes employers and directors make

• Forgetting Employment Allowance eligibility rules — single-director-only companies (with no other employees) generally cannot claim it, a detail that catches many new company owners out
• Assuming dividends reduce Corporation Tax — only salary and employer pension contributions reduce the company’s taxable profit; dividends come from profit that has already been taxed
• Ignoring associated company rules — if you run more than one company under common control, your Corporation Tax thresholds are divided between them, which can push you into Marginal Relief or the Main Rate sooner than expected
• Paying an unnecessarily high salary — for many directors, a salary significantly above the Personal Allowance triggers substantially more Income Tax and NI than the equivalent value taken as dividends
• Not budgeting for the true cost of a new hire — forgetting to factor in employer NI and pension contributions when setting a hiring budget can lead to an uncomfortable surprise on the first payroll run

Frequently asked questions

📄 Official sources

• Employer National Insurance overview
• Corporation Tax rates and reliefs
• Tax on dividends
• Claim Employment Allowance