Inside the Engine: How We Calculate Your Tax

Transparency is key to trust. Unlike "black box" calculators, we believe you should know exactly how your numbers are derived. Here is the logic powering the Director Salary vs Dividend Optimization Engine.

1. The Hierarchy of Tax

Our engine applies deductions in a strict legal order:

1. Revenue Deductions: Expenses, Salary, and Employer NIC are deducted first to find Taxable Profit.
2. Corporation Tax: Applied to Taxable Profit using 2025/26 thresholds (19% / 25% / Marginal).
3. Distributable Profit: The post-tax profit limits the maximum dividend you can legally take.
4. Personal Tax: Salary and Dividends are combined.
   • Salary uses the Personal Allowance first.
   • Dividends utilize the Dividend Allowance (£500).
   • Bands (Basic/Higher/Additional) are applied to the remainder.

2. National Insurance Assumptions

We use the Annual Earnings Period for Directors.

• Primary Threshold: £12,570.
• Secondary Threshold: £5,000 (The new lower limit for 2025/26).
• Rate: 15% for Employers.

3. Student Loans

We calculate Student Loan repayment based on Adjusted Net Income (Salary + Dividends) exceeding the plan threshold.

• Note: We apply the calculation to the entire excess, as per Self Assessment rules.

4. Marginal Relief

Many calculators use a flat 19% or 25%. We use the full HMRC formula: ((Upper Limit - Profits) * Fraction) - Standard Tax This ensures that if you earn £51,000, you pay the correct marginal rate, not a flat 25%.

Data Sources

All rates are sourced directly from:

• HMRC Rates and Thresholds
• Spring/Autumn Budget 2025 Announcements

Disclaimer: This tool provides estimates for planning. Final liability is determined by HMRC.