Contractors' Questions: Can I draw a salary even if I'm not trading?

Contractor’s Question: I’ve been taking a monthly salary since April 2016 but my contract expires later this month. My accountant says that since I won't be trading in October (my contract will be finished by then so I won’t be billing), I cannot draw a salary. Is he correct?

Regardless, as the first £5,000 of dividends is tax free and the personal allowance is £11000, if I choose not to draw a salary at all, isn’t it the case that I can take £16,000 as dividends and not pay any tax?  

And what about expenses? Even though I'm not trading, i.e. don't have a contract, I'm still the director of my company and am running it, so shouldn’t I still be allowed to draw a salary, as well as claim expenses from September onwards?

Expert’s Answer: It’s important to remember that you are an employee of your limited company, and not the company you contract for i.e. the end-user. As such, you will still be able to draw a salary even after your contract has finished. If you choose to do this, we recommend ensuring that you have enough funds to cover any of your tax obligations as well as your salary.

As the director of your company you are entitled to receive a salary. You can also receive a salary for undertaking other work for the company; such as administration. As the director, it is ultimately your choice how much you choose to pay yourself in salary.

When it comes to your salary, a point to note is that the tax year will only count as a qualifying year for state pension purposes if you earn a salary of at least £5,824 in the year.

You are correct that your personal tax free allowance is £11,000 and there is a £5,000 dividend tax-free allowance. Therefore, if you have no other personal income, you could receive £16,000 in dividends without paying tax. However, as you have been taking a salary since April 2016 you will already have used some of your personal tax-free allowance, meaning your total tax free dividends would be below £16,000. 

Should your business still be incurring legitimate business expenses after your contracts ends, these can still be claimed.

The expert was Greg Timson of contractor accountancy firm inniAccounts.

Wednesday 14th September 2016