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Optimal salary in 2016/17 for Contractors and Small Business owners

Short Answer

If you are the sole employee of your company then the optimal salary is £8,040 (£670 per month) or if you have other employees and pay less than £2,600 per year in employers NIC for those employees then the optimal salary is £10,980 (£915 per month).

Who does this apply to?

This guidance applies to the majority of our Contractor and Small Business clients but not all. Specifically the following must apply:

  • You own your company so can take dividends out of it
  • You are on the standard 1100L PAYE Tax Code

When we refer to the 2016/17 tax year we mean from 6 April 2016 to 5 April 2017.


Why the number of employees matters

In 2014/15 the Government introduced a £2,000 employers national insurance allowance. This meant you don’t have to pay anything for the first £2,000 of employers national insurance incurred by your business making it beneficial to owners to pay themselves a salary in excess of the national insurance threshold (£8,060 in 2016/17) and instead up to the personal allowance (£11,000 in 2016/17).

In 2016/17 the Government has increased the NIC allowance to £3,000 but have restricted the availability of the allowance to companies that employee more than one person. At present it seems that a company that has a husband and wife on the payroll will be eligible but there is no guarantee that rules won’t be brought in to restrict this too.


Click the situation that applies to you.


Although the personal allowance is £11,000 the threshold where you have to start paying National Insurance is £8,060. If you go over the £8,060 threshold you will have to pay both employees NIC (12%) and employers NIC (13.8%) on the excess. To minimise your tax therefore you will want to keep the salary below £8,060.

    1. We recommend taking a gross salary of £670 a month or £8,040 a year.
    2. On this salary you will not pay any national insurance but don’t worry, it won’t mean your eligibility for government benefits is restricted.
    3. We then recommend taking any earnings over and above this amount as dividends.

The optimal level of dividends to complement an £8,040 salary

That tax incurred on dividends changes in 2016/17 too. You will pay 7.5% income tax on any dividends you take that push your total earnings up to the higher rate tax threshold of £43,000 and then 32.5% on dividends over that amount. If you are fortunate enough to earn more than £150,000 then that rate goes even higher to 37.5%.

Like in previous years, if you can live off it, we would recommend restricting dividends to the higher rate threshold so taking £34,960 in the year (or £2,913 per month).

That means you keep all your earnings in the basic rate tax threshold. If you have additional profits in your company and choose to pay yourself more that is of course fine but you just need to be aware that you will incur additional income tax at a rate of 32.5% per each £1 taken above £34,960.

An illustration of the income tax to expect at various dividend levels

The table below gives you an idea of the level of income tax to expect on a salary of £8,040 and any given level of dividends. Please note that this assumes you have no other income, so if you have buy to let income or a second job this will not apply.

Dividends Taken Income Tax Payments on Account Student Loan
£5,000 £0 £0 £0
£10,000 £153 £77 £49
£20,000 £903 £452 £949
£30,000 £1,653 £827 £1,849
£40,000 £3,663 £1,832 £2,749
£50,000 £6,913 £3,457 £3,649
£75,000 £15,038 £7,519 £5,899

Payments on Account – Payments on account are payments for the next year’s income tax, so you would have to pay 50% of your 2016/17 income tax bill on 31 January 2018 to be set off against your future 2017/18 income tax. You can read more about payments on account here.

Student Loan – We have included an illustration of the student loan that will be due on the given level of dividends, in case that has not been paid off.



Beware – if you have employees but are already paying more than £2,600 of employers NIC on their salaries then you should take a salary of £8,040 as you will not see any benefit from the employers NIC allowance.

The higher salary is beneficial because salary is an allowable expense for reducing your Corporation Tax, whereas dividends have no impact on Corporation Tax.

    1. We recommend taking a gross salary of £915 a month or £10,980 per year.
    2. On this salary you will incur employees national insurance of £350.40 but that will be offset by an additional £584 of corporation tax relief so works out favourably.
    3. We then recommend taking any earnings over and above this amount as dividends.

The optimal level of dividends to complement a £10,980 salary

That tax incurred on dividends changes in 2016/17 too. You will pay 7.5% income tax on any dividends you take that push your total earnings up to the higher rate tax threshold of £43,000 and then 32.5% on dividends over that amount. If you are fortunate enough to earn more than £150,000 then that rate goes even higher to 37.5%.

Like in previous years, if you can live off it, we would recommend restricting dividends to the higher rate threshold so taking £32,020 in the year (or £2,668 per month) being £43,000 less £10,980.

That means you keep all your earnings in the basic rate tax threshold. If you have additional profits in your company and choose to pay yourself more that is of course fine but you just need to be aware that you will incur additional income tax at a rate of 32.5% per each £1 taken above £32,000.

An illustration of the income tax to expect at various dividend levels

The table below gives you an idea of the level of income tax to expect on a salary of £8,040 and any given level of dividends. Please note that this assumes you have no other income, so if you have buy to let income or a second job this will not apply.

*Note – This schedule does not take into account the Corporation Tax saving of a higher salary.

Dividends Taken Income Tax Payments on Account Student Loan
£5,000 £0 £0 £0
£10,000 £374 £187 £314
£20,000 £1,124 £562 £1,214
£30,000 £1,874 £937 £2,114
£40,000 £4,619 £2,309 £3,014
£50,000 £7,869 £3,934 £3,914
£75,000 £15,994 £7,997 £6,164

Payments on Account – Payments on account are payments for the next year’s income tax, so you would have to pay 50% of your 2016/17 income tax bill on 31 January 2018 to be set off against your future 2017/18 income tax. You can read more about payments on account here.

Student Loan – We have included an illustration of the student loan that will be due on the given level of dividends, in case that has not been paid off.


No dividend tax credit to confuse things

You may have noticed that we haven’t mentioned the dividend tax credit. That goes this year, which is great news as it was always far too difficult to understand.

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