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Optimal salary in 2017/18 for Contractors and Small Business owners

Short Answer

If you are the sole employee of your company then the optimal salary is £8,160 (£680 per month) or if you have other employees and pay less than £2,600 per year in employers NIC for those employees, which equates to combined gross salaries of about £40,000, then the optimal salary is £11,500 (£958 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 1150L PAYE Tax Code

When we refer to the 2017/18 tax year we mean from 6 April 2017 to 5 April 2018.


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 (£8,160 in 2017/18) and instead up to the personal allowance (£11,500 in 2017/18).

In 2016/17 the Government increased the NIC allowance to £3,000 but restricted the availability of the allowance to companies that employe more than one person only. 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 £11,500 the threshold where you have to start paying National Insurance is £8,160. If you go over the £8,160 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 £8,161.

    1. We recommend taking a gross salary of £680 a month or £8,160 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 £8,160 salary

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 £45,000 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 no more than £36,840 in the year (or £3,070 per month). Once combined with the recommended salary that results in total earnings of £44,900 per year.

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 £36,840.

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 £8,160 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 £125 £62 £60
£20,000 £875 £437 £960
£30,000 £1,625 £812 £1,860
£40,000 £3,165 £1,582 £2,760
£50,000 £6,415 £3,207 £3,660
£75,000 £14,540 £7,270 £5,910

Payments on Account – Payments on account are payments for the next year’s income tax, so you would have to pay 50% of your 2017/18 income tax bill on 31 January 2019 to be set off against your future 2018/19 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 each given level of dividends, in case that has not been paid off. Bear in mind that these numbers are only accurate for SL1 schemes not the newer SL2 schemes that apply to the most recent graduates.



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 £8,160 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 £958.33 a month or £11,500 per year.
    2. On this salary you will incur employees national insurance of £400.80 but that will be offset by an additional £668 of corporation tax relief so works out favourably overall.
    3. We then recommend taking any earnings over and above this amount as dividends.

The optimal level of dividends to complement an £11,500 salary

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 £45,000 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 £33,500 in the year (or £2,791 per month) being £45,000 less £11,500.

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 £33,500.

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 £11,500 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 £375 £188 £360
£20,000 £1,125 £563 £1,260
£30,000 £1,875 £938 £2,160
£40,000 £4,101 £2,050 £3,060
£50,000 £7,351 £3,675 £3,960
£75,000 £15,476 £7,738 £6,210

Payments on Account – Payments on account are payments for the next year’s income tax, so you would have to pay 50% of your 2017/18 income tax bill on 31 January 2019 to be set off against your future 2018/19 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. Though bear in mind that these normals are only accurate for the SL1 scheme, not the SL2 scheme that more recent graduates are on.