Question, I trade as a limited company contractor (I am the only director and shareholder) and I am about to have a six month break between contracts. I don’t plan to take dividends during my break, but am I OK to keep drawing a monthly salary?

 

contractor-salary

Answer, November 2016

During your break, although your company won’t be earning income, you will still be a director of your company therefore you can continue to be paid a salary for your role as a director, should you wish.

It is important to consider carrying on your salary, not just for tax efficiency purposes, but also to protect your national insurance position by ensuring your salary over the course of the tax year is above the lower earnings limit threshold – we explain this in our salary and dividend article for 2016/17.

Even if you decide not to pay yourself a salary you must continue to report the monthly payroll RTI returns to HMRC.

If you do pay a salary it is important to ensure you have enough money in the company to cover tax obligations and the overheads you need to keep it running.

Bear in mind that by having monthly costs but no income, your retained profits available for dividends will be reducing.

Although you mentioned that you will not be taking dividends during your break, as long as you have sufficient profits you can take dividends if you wish.

With regards to dividends, from 6th April 2016 a new dividend allowance has been introduced which means that an individuals first £5,000 of dividends are tax free.

Over and above this £5,000 the dividend income is taxed as follows:

  • If you have any un-used personal allowance (£11,000 for 16-17) that element is tax free
  • Any dividends in the basic tax band (up to £43,000 for 16-17) attract a tax charge of 7.5%
  • Dividends above the basic tax band are charged at 32.5%
  • Additional rates of tax will apply at the upper tax band (£150,000 for 16-17)

Please refer to our guidance on optimum salary and dividend planning for 2016/17.