How to do this? Question on tax and dividends.

LouC

Hi there,

I need some financial advice and hope people may be able to help.

I’m a consultant with my own limited company. I’m the sole shareholder. My new wife is the director in her family business.

Let’s say I have 100K in my company’s business accounts.

Now I want to try and get the money from the business in the most tax efficient manner. At the moment I take from it, in salary and dividends, about 38k p.a. – which keeps me just under the higher tax bracket personal allowance limit. My wife receives 5K a year in dividends as shareholder in her family business as her sole income.

So, what are our options?

• If I were to make my wife a shareholder in my business, how would this work out regarding dividend payments to her? Say, for example, I wanted to pay her a 10k dividend, what would be the tax implications for this? Would my company only have to pay the 21% corporation tax liability?

So, the calculations would be:

10,000 - Dividend
-2100 – Corp tax liability (paid by my company)
7900 - Net amount available (to her)

Is that correct?
Would this be affected by the other 5K dividend being paid to her by the other company? Or would that not come into question as long as she stays under the higher tax bracket threshold?

• The other option seems to be to make her an employee. If I were to hire her as a secretary and pay her under the £6035 lower limit, does this mean that in tax terms she would only pay her employers NI, and her family business would only pay the 21% corporation tax liability on her 5K dividend? On top of that, I would pay the employers NI (12.8%, so approx £650).

Sorry for the million questions, but is that about it? Is there another way I’ve not considered?

Many thanks for all your help!


Lou

mtfree

Hate to say this Lou but i think you need an accountant. Your situation is where the inland revenue are looking at income sharing among spouses. It is important them i beleive that whatever you give your mrs you need to be able to prove she earned and it not just a way of diverting your own income.

You can pay her a salary and she will pay PAYE and national incurance as any other employee. Any salary is allowable against the companies corporation tax.

Corporation tax paid by the comapny is on the taxable profit and not just on the dividends

Mister_E_4

With a ltd company dividends are usually the most tax effective way to take money out of the company,
Your wife should take her NIC limit as salary (currently £5435), no tax/NI to pay on this and it is deductible against Corp Tax.
Anything above that should usually be dividends as no tax/NI to pay as long as she is not in higher rates of tax. Although there will not be a CT deduction for the divs paid it is usually cheaper overall.
You could make her an employee of your company and pay £5435 (instead of her getting £5435 from her company). If you pay £6035 she will use her tax allowance BUT NI will be payable (about £66 employee and £77 employer)
As long as only one salary is paid then all other payments by divs should result in no further tax as long as your wife is not in the higher rate tax bracket.
So make sure wife is using her allowances for tax via a salary (from either company) and the rest is in dividends.

One word of warning - in April it is expected the new "income shifting" proposals will come into effect. Under these if you pay your wife divs from your business these could end up being treated as your income, IF they make you liable to 40% tax. It is likely these rules will be complex but you may be able to avoid them by paying a salary from your company and divs from her company, rather than the other way round.
I would advise you to get professional help on this once we know more about the rules (which could be at the pre budget report on Monday). It will cost you but it will avoid an unexpected tax bill in the future!

LouC

Thanks for the tips.

Yep, that income shifting leg is going to be a !!!!!.,..