Delay salary to save tax

If you’re the owner-manager of a limited company, you’ve got one big advantage when it comes to tax: you decide how and when you pay yourself. That puts you in a unique position to maximise your tax efficiency – especially when you have multiple income sources.

In this post, we’ll explore the best strategy to extract income from your company without falling into tax traps, particularly if you also have other income such as rental property or freelance work.

The Traditional Tax-Efficient Income Strategy

For many directors, the standard income extraction approach is straightforward:

• Draw a small salary, just below the National Insurance threshold

• Top up with dividends, which attract lower tax rates than salary

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For 2025/26, the National Insurance (NI) secondary earnings threshold is £5,000, and employee NI kicks in at £12,570. By keeping your salary below this, you avoid both Income Tax and employee NI while still getting qualifying years for your state pension.

Then, you can take dividends up to your dividend allowance (£500) and basic rate tax band. This combo often results in a very low personal tax bill, and your company pays less in employer NI too.

But there’s a catch.

When This Strategy Fails: Other Sources of Income

If you have other income – maybe from property rentals, investments, or side businesses – you lose control over those figures during the year. Unlike your director’s salary or dividends, which you can plan and time, rental or self-employed income just… happens.

If you commit to a salary and dividend plan at the start of the tax year, you risk:

❌ Accidentally tipping into the higher rate tax bracket

❌ Losing personal allowances

❌ Paying more tax than necessary

So, what’s the smarter approach?

Treat Your Company Income as the Flexible Variable

Instead of locking in your salary and dividends early, treat them as adjustable levers. Leave your director salary decision until the end of the tax year, once you have full visibility of your other income and allowable deductions.

By deferring your salary until March or even April, you can:

✅ Avoid higher-rate tax unnecessarily✅ Use your allowances strategically✅ Maintain flexibility and control

Let’s look at how that works in practice.

Example: Ali’s Tax Strategy

Ali is the owner of Acom Ltd. He also earns:

• £12,000 per year from letting a property

• Around £20,000 per year from freelance work

That’s £32,000 in “other income” for 2025/26.

The higher rate tax threshold is £50,270 in England and Wales. So, Ali has £18,270 of headroom before paying 40% tax.

By deferring his company salary decision until the end of the tax year, Ali can:

• Take a £12,570 salary, avoiding higher-rate tax and NI

• Take £5,500 in dividends, paying just 0% on the first £500 and 8.75% on the remainder

• Avoid the higher rate tax band altogether

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Need Cash Earlier in the Year? Borrow From Your Company

But what if you need cash before March? Don’t panic.

You can borrow from your company earlier in the year and repay the loan when you finalise your salary or dividends. This is a director’s loan, and as long as:

• It stays below £10,000, it’s tax-free

• You repay it within 9 months of your company’s year-end, you avoid extra tax charges

Even if the loan goes over £10,000, the resulting benefit-in-kind tax is often modest – and can still be more efficient than taking early income that triggers higher tax.

Don’t Forget: PAYE and Dividend Records Matter

Be aware that salary payments must be reported to HMRC in real-time using payroll software. Once that salary is processed, it’s set in stone.

Dividends don’t require real-time reporting, but they should be properly documented with dividend vouchers and board minutes.

So while you have control, you need to plan carefully and keep compliant records.

Key Takeaways for Owner-Managers

✅ Treat your company income as a flexible variable, especially if you have other income✅ Defer salary decisions until later in the tax year for maximum tax efficiency✅ Use dividends to top up income at lower tax rates✅ Consider a director’s loan if you need cash early✅ Keep proper records for PAYE and dividends✅ Avoid committing too early and falling into the higher-rate trap

Need Help Planning Your Director’s Pay Strategy?

We help business owners, especially in the construction and trades sectors, stay tax-efficient while staying compliant.

📞 Let’s work together to make sure you’re not handing more to HMRC than necessary.