How Tax Shrink calculations work

What the company calculator compares

Start with company profit after ordinary business expenses but before director pay. The calculator tests possible annual salaries, adds employer National Insurance, calculates Corporation Tax on the remaining taxable profit and treats the distributable balance as a dividend. It then calculates the director's personal Income Tax, employee National Insurance and estimated take-home income. If the user adds a dividend from prior-year distributable reserves, that fixed dividend is included in every salary comparison and in the current personal-tax calculation.

If the director enters employment, pension or dividend income from outside the company, that income occupies the Personal Allowance and the tax bands first: non-savings income is taxed before dividends, dividends are treated as the top slice under one shared dividend allowance, and the Personal Allowance taper responds to combined income. Personal tax is then attributed to the company scenario by calculating the liability on all entered income and subtracting the liability on the outside income alone, so the take-home estimate keeps describing company-derived income only. Employee National Insurance stays assessed on the company salary because Class 1 National Insurance applies to each employment separately.

Highest estimated take-home among the salary and dividend combinations tested, using the assumptions shown.

Sole trader versus limited company

The sole-trader comparison starts both sides with the same annual taxable trading profit after ordinary business expenses, before owner pay and taxes. It assumes one UK-resident adult with one full-year business, below State Pension age throughout, and no other income. The company side uses the existing salary and dividend calculation, distributes all current profit and has no Employment Allowance, associated companies or prior-year reserves.

Sole-trader Income Tax uses the selected region's non-savings bands and Personal Allowance taper. Class 4 National Insurance is calculated separately on trading profit, without deducting Income Tax first. Employment National Insurance is not charged on sole-trader profit. In 2023/24, compulsory Class 2 is £179.40 for the full 52 contribution weeks only when profit exceeds £12,570. Crossing that boundary can reduce take-home. From 2024/25 there is no compulsory Class 2 payment; the result explains whether contributions are treated as paid or the excluded voluntary option may be relevant.

The difference subtracts the two displayed take-home amounts. Accountancy-fee differences, formation costs and non-tax obligations are excluded and can change the practical decision. Losses, pensions, Gift Aid, benefits, student loans, voluntary contributions, National Insurance exceptions or annual limits, part-year trading and basis-period transition profit or its spreading are outside this comparison. The same profit must be taxable on both sides; different allowable expenses, accounting bases and capital allowances are not modelled. This does not establish National Insurance entitlement or recommend incorporation.

Self-employment rules for 2023/24–2026/27 were checked on 8 September 2026 against HMRC Class 2 and Class 4 rates, Class 2 payment rules and contribution weeks. Tax-return rounding, payment dates and payments on account are excluded from this planning estimate.

Company calculator assumptions

• One full-year owner-director and a 12-month accounting period.
• No associated companies.
• No Employment Allowance unless you enter the amount remaining for the director's employer National Insurance. Tax Shrink applies what you enter, capped at the amount configured for the tax year, and does not check whether the company can claim it.
• The selected Income Tax region: England, Wales or Northern Ireland; or Scotland.
• Scottish rates apply to salary as non-savings, non-dividend income. Dividend rates remain UK-wide.
• All current-period distributable profit is paid as a dividend, unless you set a target annual take-home.
• Any prior-year reserve dividend is limited to the amount entered as confirmed distributable reserves.
• Optional other income covers two categories only: employment and pension income, and dividends from shares outside the company.
• No pension contributions, student loans, benefits in kind, savings or property income, reliefs or prior losses.

Corporation Tax financial years and personal tax years do not have identical boundaries. The model is deliberately designed for a common, simplified planning scenario rather than every possible accounting period.

Displayed figures are rounded to the penny and reconcile with each other, while the underlying calculation keeps full precision. A displayed total can therefore differ from the unrounded calculation by up to one penny. This affects presentation only and never the comparison between salary and dividend options.

Target annual take-home

The default comparison distributes every pound of current-period profit. Choosing a target annual take-home changes the question: for each salary tested, Tax Shrink solves the dividend from current profit that brings your estimated take-home to the target, then highlights the combination with the lowest estimated combined current-year tax. Any dividend you have chosen from prior-year reserves counts towards the target first.

Salaries that would already pay you more than the target without any dividend are excluded, because they cannot reach it from below. If no salary can reach the target, Tax Shrink says so and reports the most the profit can produce rather than quietly reducing your target.

Profit you do not extract stays in the company and is shown as retained profit. This is deferral, not a saving: extracting it in a later year is taxed under that year's rules. Tax Shrink does not model future years, future rates, liquidation or any capital-gains relief.

Prior-year distributable reserves

The optional reserve inputs are for retained profits from completed accounting periods that the company accounts confirm are available for dividends. They are not an estimate of cash in the bank. Cash may include VAT, PAYE, Corporation Tax provisions, loans, capital, customer prepayments or money needed for working capital.

The selected reserve distribution is available for dividends only. It does not fund salary or employer National Insurance, reduce current taxable profit or receive another Corporation Tax charge. The model continues to distribute all current-period profit left after salary, employer National Insurance and Corporation Tax, then adds the fixed reserve dividend and calculates personal tax on the combined dividend.

Corporation Tax previously paid on retained profits is not included in tax due this year and is not estimated again. The historic pre-tax profit, applicable Corporation Tax rate, marginal relief, losses and accounting-period context are unknown, so no lifetime effective-tax percentage is shown when a reserve dividend is used.

Salary remains limited by current profit. A salary that exceeds current profit after employer National Insurance can create a trading loss, and loss relief is outside this model. Tax Shrink does not confirm that the accounts legally support a dividend, that the company has enough working cash or that the required declaration, minutes and dividend voucher have been completed.

How the Income Tax region works

The region follows the taxpayer, not the company's registered office or customers. Choose Scotland only if HMRC treats you as a Scottish taxpayer; PAYE tax codes usually begin with S. Multi-home and moving cases can require HMRC's residence tests.

The calculator applies the selected regional schedule to salary. Personal Allowance and its taper, Dividend Tax, employee and employer National Insurance, and Corporation Tax remain UK-wide in this model. Outside employment, pension and dividend income entered on either calculator is modelled for its effect on allowances and tax bands only; the director's other employment's own National Insurance and net pay are not calculated. Savings interest and property income are not modelled. Self-employment profit is supported only in the separate sole-trader comparison above, where it is the only income.

Official sources

Tax rules and the prior-year-reserve boundary were last checked against these linked sources on 21 August 2026. The Lower Earnings Limit values for 2023/24 (£123 a week), 2024/25 (£123 a week), 2025/26 (£125 a week) and 2026/27 (£129 a week, £6,708 a year) were checked against the employer rates and thresholds guidance on 23 August 2026.

• GOV.UK Income Tax rates and allowances
• GOV.UK National Insurance rates and thresholds, including the Lower Earnings Limit
• GOV.UK — tax on dividends
• GOV.UK Corporation Tax rates and allowances
• GOV.UK Corporation Tax Marginal Relief
• GOV.UK — taking money out of a limited company
• HMRC — Corporation Tax trading-loss relief
• HMRC — who pays Scottish Income Tax
• Scottish Government — 2026/27 Income Tax rates
• Scottish Parliament — 2026/27 Scottish Rate Resolution

Found a result that does not reproduce? Report a calculation issue. Include the page, tax year, region and steps, but no unnecessary personal information.

Tax-year history

The UK director tax-year retrospective series explains what changed in each supported year, with worked examples and separate England, Wales or Northern Ireland and Scottish salary-tax details. Start with 2026/27 or read why the highest-tested salary and dividend split changes. Compare the configured values directly on the tax-rate page.

Limits and review

This model does not replace advice from a qualified tax professional. Tax Shrink is not HMRC guidance, and Bold Data Ltd does not claim that a tax professional has reviewed your result. Check the selected year, assumptions and official sources before relying on an estimate.

Tax Shrink's source code is private. The calculation assumptions and official inputs used by the model are documented here and on the tax-rate page.

Read the terms of use for responsibilities, corrections and proportionate liability limits.