Delay salary to save tax
Delay salary to save tax
As a company owner manager, you decide when to take income from your business. If that's your only source of income, tax planning is relatively simple but it's trickier if you have other sources. What's the best strategy to improve tax efficiency?
What's the tax strategy?
The usual income and profit extraction strategy for company owners is to draw a salary of no more than the nil earnings threshold and then add dividends at low-tax rates to arrive at the most tax-efficient level of income. It isn't rocket science. The trouble is that doesn't work if you have other sources of income, e.g., from self-employment, or you're entitled to tax relief for outgoings such as pension contributions.
Other income and outgoings
Unlike the income from your company, you have less or sometimes no control over other sources of income. Therefore, our advice is to view the income from your company as a variable factor that you can tweak to maximise tax efficiency overall.
Trap. Once you've taken income as salary and dividends from your company you can't go back and change it. Sticking to the usual strategy of deciding early in the tax year what your salary should be can mean that you've unintentionally subjected more of your income to higher rates of tax than you planned.
PAYE regulations and records
When a director draws salary of more than the NI secondary earnings threshold of £5,000 for 2025/26, it must be reported to HMRC in real time using payroll software. This means there's an up-to-date record of what's been paid to you. While you don't have to report dividends in the same way, there will be an audit trail in your company's records. This means the nature of the payments are set in stone and can't legitimately be altered with retrospective effect.
Tip: Deferring your salary until the last month of the tax year will allow you take account of your other income to set the right level for optimum tax efficiency. As explained in the tip below, this doesn't prevent you from drawing money from your company much sooner, it just means you need to take it in a different form.
Example. Ali is the owner manager of Acorn Ltd. Other than income from Acorn he receives around £12,000 per year from letting a property, plus profits from freelance activity. The latter varies from year-to-year but on average it's around £20,000. He has no other income or outgoings and therefore for 2025/26 his taxable income before salary from Acorn is £32,000. The standard threshold at which higher rate tax applies is £50,270 (in England and Wales). By not taking his salary until March 2026 he can be sure that if he takes up to £12,570 (the point at which employees' NI contributions start) it won't result in any higher rate tax liability. He can also take dividends of £5,700 and pay only the basic rate dividend tax of 0% on £500 and 8.75% on the remainder.
Tip: If you need cash earlier in the tax year you can borrow from your company and repay the debt when your salary and dividends are paid. Creating a debt in this way can result in a tax bill as it counts as a benefit in kind. However, if the loan (added to any other money you've borrowed from your company) doesn't exceed £10,000, there's no tax. Even where the borrowing exceeds £10,000 the tax bill is relatively modest.
Don't draw salary until near the end of the tax year when there's more certainty over your other income. That way you can judge how much you can take to maximise tax efficiency. If you need the cash in the meantime, borrow it from your company and repay it from salary when you draw it.