Drawing salary when not trading

[northernladuk]

Go back to your accountant and tell him he's sacked, due to him being a moron.

Indeed but the OP needs to understand how he works a little better as well.

[NickFitz]

Just because I'm not engaging in any activity that generates immediate revenue for the company it doesn't mean the company's not active, or that I as an employee have no work to do for the company that justifies my salary.

At https://www.gov.uk/guidance/corporat...n-tax-purposes one example of how a company can be considered active is "carrying on a business activity such as a trade or professional activity". As I continue with my professional development in between contracts (for example by reading relevant blog posts or books, or experimenting with programming techniques and new technologies) I figure I'm carrying on a professional activity.

In fact, I landed my current contract as a direct consequence of having taught myself new stuff by working on non-revenue-generating projects of my own when in between contracts. Call it R&D.

[smileyface]

Thanks to all for your replies.

Could it be I was not clear to my accountant, when I said not trading?

I mean my contract has finished, so am not going to bill anyone. Is that classed as not trading or dormant (or are they the same)?

Regardless, we know the first £5000 of dividends is tax free and the personal allowance is £11000, so for argument sake, if I choose NOT to draw a salary at all, (do correct me if I'm not mistaken) I can take £16000 as dividends and not pay any tax.

So in my case, since I've taken 5 months salary (Apr to Aug), I can take the remaining 7 months salary + £5000 without paying tax?

[NickFitz]

I finished a contract last September (I think it was) and didn't start another until May, because I have better things to do with my time than work for other people. My company paid me my regular salary throughout, and also declared a few dividends. My accountant never batted an eyelid, so I would assume it was OK

[jamesbrown]

Thanks to all for your replies.

Could it be I was not clear to my accountant, when I said not trading?

I mean my contract has finished, so am not going to bill anyone. Is that classed as not trading or dormant (or are they the same)?

Regardless, we know the first £5000 of dividends is tax free and the personal allowance is £11000, so for argument sake, if I choose NOT to draw a salary at all, (do correct me if I'm not mistaken) I can take £16000 as dividends and not pay any tax.

So in my case, since I've taken 5 months salary (Apr to Aug), I can take the remaining 7 months salary + £5000 without paying tax?

There's longstanding case law on trading vs. not trading. If you're actively looking for a contract, you're trading. Either you're misleading us about what you said to your accountant (i.e. intending to cease trading), you confused your accountant, or they started confused. If it's the latter, I think you know what to do...

[eek]

Thanks to all for your replies.

Could it be I was not clear to my accountant, when I said not trading?

I mean my contract has finished, so am not going to bill anyone. Is that classed as not trading or dormant (or are they the same)?

Nope your business is still trading you simply doesn't have any customers. You may or may not be searching for customers but that's a different question...

Regardless, we know the first £5000 of dividends is tax free and the personal allowance is £11000, so for argument sake, if I choose NOT to draw a salary at all, (do correct me if I'm not mistaken) I can take £16000 as dividends and not pay any tax.

So in my case, since I've taken 5 months salary (Apr to Aug), I can take the remaining 7 months salary + £5000 without paying tax?

Dividends are taken from company profits which are subject to corporation tax at 20%.

Salary up to about £10,000 is both tax and NI free (its more complex than that but I'm keeping it simple). That salary is also an expense for the company and hence reduces the profit of the company.

The usual limited company payments for a contractor are:-

Allowed travel expenses
Salary of between £8600 and £11000 depending on your preference and that of your accountant
Dividends up to the 40% limit
Pension payment from company upto £30,000
Everything else left in the company ready for a quiet period next year...

you really do need to ask your accountant how a company works and what you should be doing to minimise your company's profit. There are various guides om the menu to the left (start at the first timers link). Then if you don't like or understand the answers from your accountant find a new one before you start having serious problems...

[northernladuk]

You need to start again on the new starters guide to the right and get a much better grasp I'm afraid. You should really know much of this. I don't understand how you can plod on knowing so little about how you remunerated yourself with knowing why.

Edit : oh.. Eek said that.. Didn't see it at first.

[Andy O]

Maybe the accountant said you can't draw any more salary because you didn't have a war chest and he didn't want you spending your corporation tax and leaving you short at year end.

[smileyface]

Thanks, I've read various info on the internet but maybe don't fully understand.

My example is taken from here, example 2: http://www.contractoruk.com/limited_...tax_guide.html

It states if you only take a salary of £8060, your first £2940 of div is part of your £11000 personal allowance.

You can therefore take a further £5000 of div and not pay any tax.

Have I misunderstood something?

[northernladuk]

Yep. Ask your accountant to explain it all to you.