Tax Questions: Sharing Company Profits with a Spouse or Civil Partner

While many people are aware that sharing your company’s income with your spouse can save tax – how this works in practice for maximum tax efficiency is not so well known. Sharing your company income with a spouse or civil partner can reduce overall tax payable on it, but let’s explain the calculations.

One way to share your income is to pay your spouse/partner a salary from the business in return for work done for the company. This doesn’t suit everyone though as time and expertise to do actual work is a requirement and if there are other directors, they might not approve of this approach.

Another way, is give shares to your spouse or partner. This method doesn’t require them to work for the company, however a downside being your company can only pay dividends out of profits it hasn’t already paid out to shareholders. You may also need other shareholder permissions in place before transferring any of your shares. Some shareholder agreements might also include a restriction or conditions on share transfers.

Calculating sharing dividends

By sharing your company dividends you save income tax if your spouse/partner pays at a rate lower than you, making sharing company income with spouse/partner tax inefficient if respective incomes rise and fall.

Paying different amounts of dividends to you and your spouse/partner according to income is the best way for this to be done. Your company needs to issue a different class of shares to you and your spouse/partner. For example, it could issue you with ordinary A shares and your spouse with ordinary B shares. To prevent issues with HMRC the different classes of shares require identical rights and conditions.

Creating different classes of ordinary shares in your company and giving some to your spouse/partner allows the company to pay different rates of dividends from year to year and the rate of dividend can be tailored to make maximum use of your respective tax-free allowances and lower rate bands.

Let’s Talk

For help with your business including calculating share dividends for you and your spouse and/or partner, our team of tax specialists can help, let’s talk.

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