Written by Daniel Cotter
Ward Goodman
August 6, 2025
As a company director, one of your biggest advantages is flexibility. You’re in charge of how and when you take income – but that power can be a hidden tax trap if not used wisely.
Taking a fixed salary early in the tax year might seem simple, but it could push you into a higher tax band if your other income grows unexpectedly. Alternatively, delaying your salary until later in the year gives you a clearer picture of your total earnings, and an opportunity to minimise tax.
In this post, we’ll explain how this works, why it matters, and how to make the most of it without falling foul of HMRC rules.
Key Insights
- Delaying your director’s salary until year-end gives you flexibility to ensure you are being as tax efficient as possible.
- Helps avoid tipping into higher tax brackets when you have other income sources.
- You can still access company funds earlier via loans or dividends.
- Final salary should be based on your total income picture for the year.
- Accurate PAYE reporting is required once salary is set and paid.
What’s the Strategy?
Many directors keep their salary just above the National Insurance (NI) threshold and top it up with dividends. It’s a common approach and works well if that’s your only source of income. But if you also earn from other sources – say, rental income, freelance projects or investments – that approach might not be optimal.
Instead, think of your salary as the last piece of the puzzle. By waiting until the end of the year to decide how much to draw, you can factor in everything else first and avoid paying unnecessary tax.
Why Timing Matters
When you delay setting your salary until March (the last month of the tax year), you’re giving yourself time to understand your full income picture. If you’ve already earned more than expected elsewhere, you can reduce your salary. If income was lower than anticipated, you will have room to top it up.
And remember – you can still access funds earlier in the year through dividends or director’s loans. The key is not finalising the salary until the numbers are clear.
Example
Jasmine runs a design consultancy through her limited company. Over the course of the year, she earns £18,000 from licensing digital artwork and £10,000 from part-time tutoring – a combined total of £28,000 from other sources.
Her non-salary income varies, so she waits until March to set her director’s salary. By then, she has a clear picture of her total outside earnings, which confirms the earlier estimate of £28,000. To bring her closer to the basic rate threshold (£50,270), she chooses to draw £15,000 in salary and £7,000 in dividends from her company. This approach allows her to maximise her available allowances while still keeping her overall income within the basic rate band, helping her avoid higher tax rates unnecessarily.
Think About All Income Sources
Your income from outside the company – such as rental properties, part-time freelance gigs, or investment returns – is often unpredictable. Some months you might do well, others not so much. These income streams are usually reported through self-assessment and can carry their own tax implications.
That’s why it’s smart to treat your company salary as the ‘balancing figure’. Once you’ve got a firm view of your other earnings for the year, you can set your salary at a level that ensures you’re making full use of your tax-free allowance and staying within the basic rate tax band – without going over the edge. This flexible approach helps you avoid unnecessary tax and makes the most of your allowances.
Common Mistake to Avoid
Many directors get caught out by setting a fixed salary at the start of the year, only to find that unexpected income or gains – from a successful investment, a property sale, or higher dividends – nudges them into a higher tax band. Once salary or dividends are paid and reported, you can’t reverse them.
Overpaying tax isn’t just frustrating – it’s avoidable. Instead, build in flexibility. Use a director’s loan if you need cash early, and delay setting your final salary until your income from other sources is clearer. This approach allows you to make more informed, tax-efficient decisions.
Don’t Forget Compliance
While flexibility is key, you still need to follow the rules. If your salary is above the NI secondary threshold (£5,000 for 2025/26), it must be processed through your company’s payroll system and submitted via real-time information (RTI) to HMRC. This makes the salary final – it’s now officially on record.
Dividends are a bit more flexible in timing, but they still need to be declared properly in board minutes and reflected in your company’s accounts. Poor record-keeping or inaccurate timing can create problems during a HMRC enquiry. So while timing is a strategic tool, it must be backed up by solid documentation.
Need Cash Before March?
Delaying your salary doesn’t mean you have to wait to pay your bills. If you need funds earlier in the year, you can take a director’s loan from your company. This is essentially an advance that you repay when your salary or dividends are finalised later on.
As long as the loan is under £10,000 and repaid within nine months of your company’s year-end, there’s no tax to pay. If it goes over that threshold you will need to pay the company some interest or suffer income tax on the benefit provided to you. If the loan lingers too long, there will be a temporary corporation tax charge – but it’s usually recoverable once the loan is repaid. This makes it a helpful stopgap when timing your income strategically.
Key Takeaway
Hold off on setting your director’s salary until the end of the tax year. It gives you flexibility, helps avoid surprise tax bills, and allows you to tailor your income based on what you’ve actually earned elsewhere.
Need funds earlier? Use a loan or dividend – just keep your salary flexible until you’ve seen the full picture.
Speak to Our Tax Planning Experts
Everyone’s finances are different. If you’re unsure how best to manage your director’s salary or want personalised advice to reduce your overall tax liability, our team at Ward Goodman can help.
We work with owner-managed businesses across Dorset and other parts of the UK to create smarter, more efficient tax strategies. Whether you’re navigating multiple income streams or looking for help with compliance, we’re here to guide you.
Contact us today for a friendly chat or to book a free consultation at one of our Dorset offices.
