Calculation Methodology

Transparency is key to financial planning. This page breaks down the exact mathematical logic used by our 2025–2027 Director Tax Optimizer so you can verify the accuracy of our director-dividends.io recommendations.

1. Company Level Logic

Operating Profit Calculation

We first determine your company's net revenue based on your VAT scheme:

• No VAT: Net Revenue = Gross Revenue
• Standard (20%): Net Revenue = Gross Revenue / 1.20
• Flat Rate: Net Revenue = Gross Revenue * (1 - Flat Rate %)

Operating Profit = Net Revenue - General Expenses.

Corporation Tax & Marginal Relief

For the 2026/27 financial year, the Corporation Tax rates used are:

The Marginal Relief formula applied is:

Employer National Insurance

Employer NI is calculated on the director's gross salary above the Secondary Threshold (£5,000 per year for 2026/27):

2. Personal Level Logic

Personal Allowance & The 60% Trap

The standard Personal Allowance is £12,570. However, for every £2 earned over £100,000 (Adjusted Net Income), the allowance is reduced by £1.

This creates the infamous "60% Tax Trap" between £100,000 and £125,140, where the loss of tax-free allowance effectively adds 20% to the 40% higher rate.

Dividend Taxation (2026/27)

Dividends are taxed according to your total income band after the £500 Dividend Allowance is used:

• Basic Rate: 10.75%
• Higher Rate: 35.75%
• Additional Rate: 39.35%

Student Loan Repayments

If active, repayments are calculated on total personal income (Salary + Dividends) above the specific plan thresholds:

3. Optimization Strategy

Our "Optimal Split" algorithm prioritizes the following order of extraction:

1. LEL Salary: We first allocate a salary at the Lower Earnings Limit (£6,708 for 26/27) to secure a qualifying year for State Pension without triggering NI.
2. Dividend Allowance: We utilize the tax-free £500 dividend allowance.
3. Basic Rate Dividends: We fill the Basic Rate band (up to £50,270 total income) with dividends to avoid the higher 40% income tax rate.
4. Pension Sweep: In our automated tuning, we identify surplus profits that would trigger Higher Rate tax and suggest redirection into an Employer Pension contribution to save Corporation Tax and avoid personal tax leakage.