For a husband and wife working in their own limited company, the familiar policy of taking modest salaries and drawing the remaining profits as dividends deserves a fresh look. The £10,500 Employment Allowance can make larger salaries more attractive.
In the example below, paying salaries of £40,000 each leaves the couple £1,704.13 better off than taking £12,570 each and paying the remaining profit as dividends to the husband. Every stage of the calculation is shown.
1. The assumptions
- The calculation uses 2027–28 rates for England, Wales and Northern Ireland.
- The company has £80,000 profit before the couple’s salaries and employer’s National Insurance, with no other employees.
- Both spouses work in the business. Their salaries must represent commercially reasonable payment for the work actually performed.
- Both are below State Pension age, have no other income and have their full £12,570 Personal Allowances available.
- The company qualifies for the £10,500 Employment Allowance. Both spouses are paid above the employer’s NI threshold, satisfying the additional employee condition, and the other eligibility requirements are met.
- The company has a full 12-month accounting period, no associated companies, no losses or other tax adjustments, and no other income affecting Corporation Tax marginal relief.
- All profit remaining after Corporation Tax is available for distribution and is paid as a dividend to the husband alone. No dividend is paid to the wife.
- No pension contributions, student loans or other personal tax charges or reliefs are included. NI is illustrated on an annual basis; payroll rounding and earnings periods can produce small differences.
2. Why £80,000 of combined salaries uses the full allowance
Employer’s NI is 15% on salary above £5,000 per person. Employee NI normally starts above £12,570 at 8%. These are separate charges: a salary of £12,570 avoids employee NI, but it does generate employer’s NI before Employment Allowance.
Where both salaries exceed £5,000, the equation for using the full £10,500 allowance is:
[(S1 − £5,000) + (S2 − £5,000)] × 15% = £10,500
S1 + S2 = (£10,500 ÷ 15%) + £10,000 = £80,000
Thus £40,000 each generates employer’s NI of £5,250 each, or £10,500 in total. Employment Allowance offsets the whole amount, leaving no employer’s NI payable.
At salaries of £12,570 each, employer’s NI is 2 × (£12,570 − £5,000) × 15% = £2,271. That is also fully covered, but £8,229 of the allowance remains unused. Unused allowance is not a cash payment to the company and cannot be carried forward.
3. Option A: salaries of £40,000 each
The salaries absorb the entire £80,000 business profit. Employer’s NI is fully covered by Employment Allowance, leaving no taxable company profit, Corporation Tax or dividend.
Each spouse’s personal calculation is:
- Gross salary: £40,000.00.
- Less Personal Allowance: £12,570.00.
- Taxable salary: £27,430.00.
- Income Tax: £27,430 × 20% = £5,486.00.
- Employee NI: £27,430 × 8% = £2,194.40.
- Total personal tax and NI: £7,680.40.
- Net salary: £32,319.60.
For the couple together, tax and NI total £15,360.80, or 19.20% of the original £80,000 profit. Combined net income is £64,639.20.
4. Option B: salaries of £12,570 each, with dividends to the husband
Neither spouse pays Income Tax or employee NI on these salaries. The £2,271 employer’s NI is fully offset by Employment Allowance.
Company profit after salaries is £80,000 − £12,570 − £12,570 = £54,860.
Corporation Tax is not simply 19% of this amount, because taxable profit exceeds £50,000. Marginal relief applies:
- Tax at 25%: £54,860 × 25% = £13,715.00.
- Marginal relief: (£250,000 − £54,860) × 3/200 = £2,927.10.
- Corporation Tax payable: £13,715.00 − £2,927.10 = £10,787.90.
- Profit available as a dividend: £54,860.00 − £10,787.90 = £44,072.10.
The husband has already used his Personal Allowance against his salary. His dividend is taxed as follows:
- First £500: covered by the dividend allowance.
- Next £37,200 at 10.75%: £3,999.00.
- Remaining £6,372.10 at 35.75%: £2,278.03.
- Total dividend tax: £6,277.03.
The £500 dividend allowance uses part of the £37,700 basic-rate band. It does not extend that band.
Total paid to the state is therefore £10,787.90 Corporation Tax + £6,277.03 dividend tax = £17,064.93, or 21.33% of the original profit. Household net income is £62,935.07: the two salaries of £25,140 plus the £44,072.10 dividend, less £6,277.03 dividend tax.
5. The comparison
| Calculation | £40,000 salary each | £12,570 each plus husband’s dividend |
|---|---|---|
| Original business profit | £80,000.00 | £80,000.00 |
| Husband’s salary | £40,000.00 | £12,570.00 |
| Wife’s salary | £40,000.00 | £12,570.00 |
| Employer’s NI before allowance | £10,500.00 | £2,271.00 |
| Employment Allowance used | (£10,500.00) | (£2,271.00) |
| Employer’s NI payable | £0.00 | £0.00 |
| Employment Allowance unused | £0.00 | £8,229.00 |
| Company taxable profit | £0.00 | £54,860.00 |
| Corporation Tax | £0.00 | £10,787.90 |
| Dividend to husband | £0.00 | £44,072.10 |
| Husband’s salary Income Tax | £5,486.00 | £0.00 |
| Wife’s salary Income Tax | £5,486.00 | £0.00 |
| Husband’s employee NI | £2,194.40 | £0.00 |
| Wife’s employee NI | £2,194.40 | £0.00 |
| Husband’s dividend tax | £0.00 | £6,277.03 |
| Total to the state | £15,360.80 | £17,064.93 |
| Percentage to the state | 19.20% | 21.33% |
| Household net income | £64,639.20 | £62,935.07 |
The £40,000-each option saves £17,064.93 − £15,360.80 = £1,704.13 a year.
6. Does this establish the optimum salary?
It establishes that £40,000 each beats the particular £12,570-each arrangement illustrated here. It does not establish that £40,000 each is the best possible salary policy. The £80,000 figure is the point at which this two-person payroll uses the full Employment Allowance; it is not automatically the point at which total tax is lowest.
Other salary levels and splits, different profit levels, each spouse’s other income, age and NI position, pension contributions, and the ownership and dividend rights of the shares can change the answer. A dividend split between shareholders would be a different comparison. Paying combined salaries above £80,000 would also begin to create employer’s NI payable under these assumptions.
Above all, a salary must be supportable by genuine work. A theoretical tax saving does not justify an excessive salary for duties that have not been performed.
7. Why I do this work for clients
There are very different sets of rules governing the extraction of company profits through salaries or dividends and the taxation of profits earned as a sole trader or under the self-employed regime. In my view, governments spend considerable effort trying to maintain some broad equivalence between these systems as they change tax and National Insurance rates. But the equivalence is never exact.
As a tax adviser, I examine how these rules interact to work out the most suitable way for a client to draw profits. Sometimes the differences are insignificant. Even then, the calculations need to be done so that I can advise on the best policy. Often, however, the saving can run into thousands of pounds a year. That is welcome extra disposable income at a time of high taxation and pressure on household finances.
Sources and calculation basis
Prepared 11 November 2026 using the published 2027–28 rates. Figures are illustrative annual calculations, rounded to the nearest penny. The comparison concerns the specified company arrangements; it is not a calculation of the sole-trader alternative.