Mid-year is the perfect time to review how you’re paying yourself. If you set a salary and dividend strategy at the start of the tax year and have since been busy running your business, managing clients, chasing opportunities, and dealing with everything else that comes with being your own boss, you may not realise that a lot can change in the six months.
Your profits might be higher than expected, your personal income could look different, tax allowances may have shifted, or perhaps you’ve got new plans for the business that weren’t even on your radar back in April. That’s why a mid-year review can be so valuable.
At Polaris Accounting, we’ve had countless conversations with directors who assumed their existing approach was still working well, only to discover there were opportunities to improve it.
Unsure if your current approach is still right? Let’s have a chat and explore your opportunities.
Salary vs dividends, what’s the difference?
If you’re a director of a limited company, there are usually two main ways to take money from your business: salary and dividends.
| Paying yourself a salary A salary is paid through PAYE, just like an employee’s wage. It’s subject to Income Tax and National Insurance, and the company may receive Corporation Tax relief on the cost. | Taking dividends Dividends are payments made to shareholders from company profits after paying Corporation Tax. Dividends aren’t subject to National Insurance, but they do have their own tax rules and allowances. |
For many directors, the most tax-efficient approach is a combination of both.
But even if it sounds like a great plan, the challenge is that there isn’t a single formula that works for everyone. The right balance depends on your profits, your personal income, your tax bracket, your future plans, and your individual circumstances, which is why it’s always worth reviewing things throughout the tax year rather than relying on last year’s strategy.
Why company directors should review their salary and dividend mix mid-year
Here are a few reasons why you should review your remuneration strategy mid-way through the year and how it can benefit you.
- Your business might be performing differently than expected
Businesses rarely follow a perfectly straight line. This could mean higher or lower profits than you initially expected, changes in your cash reserves, or a new investment opportunity you’re suddenly planning for. A mid-year review helps you understand what your company can realistically afford and whether your current salary/dividend strategy still makes sense. - Tax rules and allowances can change
We all know how quickly tax rules can change (it’s our job to stay on top of them). Even slight changes to Income Tax thresholds, Corporation Tax, National Insurance rates, or dividend allowances are important to watch out for, and they might well be the reason why your strategy from last year no longer works. When changes are announced, it’s always worth taking a fresh look at how you’re paying yourself. A quick review and some professional tax advice could uncover opportunities to improve your salary and dividend mix before the tax year gets away from you. - Your personal circumstances can change
Some changes could push you into a higher tax band, which is precisely the time to start thinking smartly about your tax strategy. Whether it’s new earnings like rental income or pension income, or a spouse or partner joining the business, there’s always an opportunity to review and tweak your strategy before the year is up. It can help you spot opportunities to use available tax allowances more effectively and make sure your salary and dividends still fit your wider financial goals.
How a mid-year review can help you avoid a surprise tax bill
Finding out you owe more tax than you expected can quickly take the shine off an otherwise successful year. That’s why we encourage company directors to review their position before the end of the tax year.
A mid-year review gives you the chance to step back and look at the bigger picture. How much have you already taken from the company? Are your profits where you expected them to be? Has anything changed personally that could affect your tax position?
We’ve seen directors take dividends throughout the year, only to discover they’ve moved into a higher rate tax band or created a larger personal tax liability than planned. Neither of these situations are unusual, but they’re much easier to manage when spotted early on instead of reacting after the event.
Building a tax-efficient salary and dividend strategy for the rest of the tax year
Good tax planning isn’t about squeezing your tax bill as low as possible. It’s about finding the right balance for your business as well as your personal finances.
When we review a director’s remuneration strategy, we:
- Review profits
- Review cash flow
- Review upcoming tax liabilities
- Consider future investment plans
- Consider personal financial goals
- Build a plan rather than reacting month-to-month
If your company has had a particularly strong first half of the year, taking additional dividends might make sense. But if you’re planning to buy new equipment, hire staff, or put a bit more money aside in the business, retaining more profit in the company could be the better option.
The right approach will look different from one director to the next.
When does it make sense to take more dividends?
Dividends are a valuable and tax-efficient way of extracting profit from your company, particularly as they aren’t subject to National Insurance.
However, they can only be paid from available profits, and what’s right for one director won’t necessarily be right for another. It’s important to remember that a company may look profitable on paper yet still need funds for future growth, equipment purchases, investment opportunities, or working capital.
It may make sense to increase dividends if:
- The company has sufficient distributable profits
- Cash flow is healthy
- You’ve already used available salary allowances efficiently
- Your wider tax position supports it
When might a higher salary be the better option?
Dividends often get most of the attention, but there are times when increasing your salary deserves a closer look.
For example, a higher salary may help if you’re applying for a mortgage, building qualifying years for your state pension, or making use of available allowances. Sometimes it can also support wider tax-planning goals, depending on your personal circumstances and how the company is performing.
This is why remuneration planning isn’t simply a case of comparing tax rates. It’s about understanding how different decisions fit into your bigger picture and choosing an approach that works for both you and your business.
Don’t overlook pension contributions
If you’re weighing up salary vs dividends, don’t forget about pension contributions. Employer pension contributions can often be an extremely tax-efficient way to move value from your company into your personal finances while also investing in your future.
You can usually contribute up to £60,000 a year tax-free into your pension through your company. Making contributions this way can help reduce your company’s Corporation Tax bill, grow your pension pot, and support your long-term retirement plans, all while being free from Income Tax and Capital Gains Tax. If you’re a higher rate taxpayer, you may also be able to claim additional tax relief, making pension planning an even more attractive option.
A mid-year review is a great opportunity to revisit this area. If profits are stronger than expected, there may be an opportunity to boost your pension while making your overall remuneration strategy work harder for you. After all, good tax planning isn’t just about this year’s numbers. It’s about putting yourself in a stronger position for the years ahead.
Keeping your salary and dividend strategy on track
Mid-year is your chance to get ahead, review your strategy, avoid surprises, and make confident decisions. For most company directors, it’s not really a question of salary or dividends. It’s about finding the right balance between the two.
What worked at the start of the tax year may not be the best approach now if your profits or plans have changed in any way at all.
There are a few practical areas worth keeping an eye on:
- Making sure dividends are supported by sufficient profits
- Reviewing whether your salary level is still appropriate
- Keeping dividend paperwork and vouchers up to date
- Recording withdrawals correctly
- Maintaining a clear separation between personal and company finances
- Considering pension contributions alongside salary and dividends
And it never hurts to speak to an accountant who’s seen it all before.
Ready to make your numbers work harder for you?
At Polaris Accounting, we’ll help you make sense of the numbers and build tax-efficient strategies that support both your business and personal goals. If you’d like a fresh perspective on your salary, dividends, pension contributions, or wider tax strategy, we’d love to have a chat. Give us a call on 01483 399 721 or book your consultation with financial adviser James at a time that works for you.
Read more: Will HMRC contact me if I need to do a Self-Assessment?
Frequently asked questions about salary and dividend tax planning
Is it better to take a salary or dividends as a company director?
Usually, neither option is best on its own. Many directors take a combination of salary and dividends because it can be a more tax-efficient outcome, but ultimately it all depends on your business, your personal financial situation, and your wider goals.
What is dividend allowance?
Dividend allowance is the amount of dividend income you can receive in a tax year before dividend tax starts to apply. For the 2026/27 tax year, the dividend allowance is £500. So, if you receive dividends above that amount, you may need to pay tax on the extra, depending on your overall income and which tax band you fall into.
Can company directors change their salary during the tax year?
Yes, it is possible to change your salary midway through the year, but you’ll need to make sure it’s processed and reported properly, and consider how it might impact other aspects of your business.
How often can a limited company pay dividends?
There’s no strict rule on this. Some companies pay dividends monthly, while others pay them quarterly or annually. The thing to keep in mind here is that the company has sufficient profits available and that the correct paperwork is completed each time. We often encourage clients to think about dividend timing as part of a broader tax-planning conversation rather than simply taking money out whenever it’s needed.
Can dividends be paid if the company is not making a profit?
No. Dividends can only be paid from distributable profits. If there aren’t sufficient profits in the business, taking dividends can create compliance issues and potentially lead to tax complications later on.
