Do I have to pay tax on dividends?

Reason123

Hi


I am in full time employment and do hit the 40% tax bracket.


I have a youtube channel as a side business and I set up a LTD company and the funds get paid into a business account.


I pay corperation tax on the profits with whats left over I take a monthly dividend. I believe I can take up to £5000 per year before paying a dividend tax?


But now its in my personal account - Should I also pay personal tax on this dividend?


Cheers

CLAPTON

Reason123 wrote: »

Hi


I am in full time employment and do hit the 40% tax bracket.


I have a youtube channel as a side business and I set up a LTD company and the funds get paid into a business account.


I pay corperation tax on the profits with whats left over I take a monthly dividend. I believe I can take up to £5000 per year before paying a dividend tax?


But now its in my personal account - Should I also pay personal tax on this dividend?


Cheers

first 5,000 of dividends is tax free for the current tax year 2016-17 onwards

TheCyclingProgrammer

Yes, first £5k of dividends over the personal tax threshold has a zero tax rate, the rest are taxed at 7.5% if you're a basic rate payer and 32.5% if you're a higher rate payer.

You need to declare them on your tax return if you do one (I'm guessing you do as its common, albeit not legally required, for company directors to do one). If you never take dividends above the £5k amount and don't already do a tax return, there's no need to notify HMRC.

Reason123

Thanks so for arguments sake is the below correct?


YouTube IE my LTD earns me £20'000 per year


I pay corporation tax on £20'000 = £4'000
Remaining monies = £16'000


My wife as basic tax payer will need to self declare and pay 0% Personal Tax on first £5'000 and 7.5% thereafter
Me as a higher rate payer will pay 0% Personal Tax on first £5'000 and 32.5% thereafter


With this in mind - should the company pay myself £5'000 and my wife the remaining £11'000 (£6000 at 7.5% taxable) to help reduce overall Tax bill?


Once then in our personal accounts she can then transfer all funs to me?


Thanks

[Deleted User]

The company votes and declares a dividend. The dividend is paid to the shareholders. Each shareholder receives a dividend in accordance with the amount of shares held (usually). What is the shareholding position in your company?

uknick

Would you be caught under the settlements legislation

http://www.icpa.org.uk/portal/tax/settlements_legislation

if you do it exactly as you suggest?

This thread suggests some ways of avoiding the charge;

http://www.accountingweb.co.uk/any-answers/does-it-matter-what-happens-to-dividend-money-paid-to-spouse-after-its-entered-their

i.e. have her pay for things such as the mortgage and other house bills from her personal account.

Reason123

Its 50/50 my wife and I
So as dividends we must receive £8'000 each in this case?

Reason123

uknick wrote: »

Would you be caught under the settlements legislation

http://www.icpa.org.uk/portal/tax/settlements_legislation

if you do it exactly as you suggest?

This thread suggests some ways of avoiding the charge;

http://www.accountingweb.co.uk/any-answers/does-it-matter-what-happens-to-dividend-money-paid-to-spouse-after-its-entered-their

i.e. have her pay for things such as the mortgage and other house bills from her personal account.

Thanks for highighting this.

TheCyclingProgrammer

uknick wrote: »

Would you be caught under the settlements legislation

http://www.icpa.org.uk/portal/tax/settlements_legislation

if you do it exactly as you suggest?

Possibly yes, as to pay the dividends disproportionally to the shareholdings (assuming they both hold the same class of ordinary shares) would be to use a dividend waiver, and HMRC have successfully challenged waivers like this under settlements legislation.

Reason123 wrote: »

Its 50/50 my wife and I
So as dividends we must receive £8'000 each in this case?

Yes, to avoid any potential hassles. You will both receive £5k dividends tax free, you will pay £975 tax on your remaining £3k and your wife will pay £225.

No she should not simply transfer the dividends to you. They are not yours, they are hers. She is technically free to do what she wants with them, but doing something like this will to HMRC look like an obvious arrangement for tax avoidance purposes and may again, put you at risk of being caught by the settlements legislation. A small one, perhaps, but still a risk.

The landmark case on income shifting between spouses was the Arctic systems case. This case established in most cases that a gift of ordinary shares between spouses would not be caught by the settlements legislation due to the application of the "spousal exemption" in s626 of the legislation. One of the conditions for this to apply is that the gift is an "outright gift". You can see what that means here:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4205

An arrangement for somebody to transfer their dividends to their spouse might, IMO, give HMRC to argue that there were conditions attached to the gift (e.g. "you must transfer the dividends over to me").

Its on this basis that some people are cautious about paying dividends into joint accounts but all of this is speculation as I don't think there is any established case law on this particular point.

On the positive side, HMRC haven't really wielded the settlements legislation much in the last 10 years, I think they most gave up after Arctic (though as I said before they *have* successfully challenged waivers).

Reason123

Thanks @TheCyclingProgrammer
I guess the way around that would be to transfer some bills to her account to compensate?

TheCyclingProgrammer

Reason123 wrote: »

Thanks @TheCyclingProgrammer
I guess the way around that would be to transfer some bills to her account to compensate?

I don't think the wording of the legislation is intended to tax somebody on what they might hypothetically do with their own income at some point in the future, barring any obvious arrangements or strings attached, though the wording of the legislation is sufficiently broad that I guess HMRC could try...I wouldn't personally worry about that and I couldn't see it standing up in a tribunal.

So yes, transferring some of the household bills into your wife's name would make sense.