HMRC's close companies consultation — what it means for your salary and dividend strategy
Direct Answer
HMRC is consulting on new reporting requirements for close companies — which includes the majority of one-man limited companies. The focus is on how directors take money out of their companies. The low salary and high dividend model that most contractors use is not being abolished, but scrutiny is increasing and HMRC has signalled that the current "sort it at year end" approach to director remuneration is under pressure. Now is a good time to make sure your salary and dividend strategy is properly documented and defensible.
What is a close company?
A close company is broadly any UK limited company controlled by five or fewer shareholders — which covers almost every one-man contractor company. HMRC has specific rules for close companies and has historically paid close attention to how profits are extracted.
What is HMRC consulting on?
HMRC says it is "modernising company reporting" — but the practical focus is on how and when directors pay themselves. The consultation signals that HMRC wants more real-time visibility of director remuneration decisions, rather than seeing everything only at year end via the company accounts.
The low salary and high dividend model that most contractors use remains legal and tax-efficient — but HMRC is making clear it will apply more scrutiny to arrangements that look like disguised salary.
What is the risk for contractors?
The immediate risk is low — this is a consultation, not legislation yet. The medium-term risk is that reporting obligations increase, making informal or undocumented salary/dividend decisions harder to defend.
Contractors who can show a clear, consistent, well-advised salary and dividend strategy are in a much stronger position than those making ad hoc decisions.
What should you do now?
Make sure your salary and dividend split is properly advised and documented
Understand the rationale for your chosen salary level (typically at or near the NI secondary threshold)
Keep board minutes or records of dividend decisions — even in a one-man company these matter
Your accountant should be advising on this proactively — if they're not, that's worth asking about
Your salary and dividend strategy should be reviewed every tax year.
It's part of what Autobooks does as standard — not an add-on.
Full-service contractor accountancy from £89+VAT/month.