Dividends are treated as if they have 10% tax deducted before you receive them, so if you draw £9,000, that is equivalent to £10,000, the standard personal allowance, but even though the company will have paid corporation tax on its profits, you can’t claim repayment of the £1,000 ‘tax credit’ and the company doesn’t get a deduction for dividends either.
Use your personal allowances first
Thus if you don’t have any other income, the first slice of your drawings should be your salary. If you draw £833 a month your tax allowance will cover all the drawings unless you also receive taxable benefits such as a car. You may pay some National Insurance contributions, but overall the tax bill should be lower.
In the current year the basic rate band is £31,865 so, allowing for the 10% tax credit you can then draw net dividends of up to £28,675 without needing to worry about higher rate tax.
Who else can you pay a salary?
No surprise here: you can pay a wage to anyone who works for the company, but the wage must both be reasonable for the work done and not more than you pay anyone else for doing similar work.
Dividends
What could be easier than to give your spouse and children shares, pay them dividends and so keep the family out of the higher rate tax net? Quite a lot actually! HMRC may try to treat the arrangement as a ‘settlement’ of which the transferor is the ‘settlor’. If they can, the transferor is still taxed on the dividends and may still pay higher rate income tax. But some arrangements do work, so I will set out what does and doesn’t, and explain how to fit this in with your personal allowances.
Shares must be more than just a right to income
Don’t use shares that deny the owners any effective interest in the capital of the company. Income from shares that only represent a right to income are taxed on you, not the recipients. You can give restricted capital rights, especially through preference shares with a fixed value, but they must have genuine value.
Dividends to children: The ‘minor’ inconvenience
Dividends on shares given to or put into trust for minor children are treated as yours for tax purposes. Once the children are over 18, you can give them shares outright.
Shares for your spouse
A gift of shares to a spouse benefits from a specific relaxation in the rules, as long what is given is more than just a right to income, so shares with no nominal value and no rights to assets on sale or winding-up won’t work. What you can do is have separate classes of share on which you can vote different amounts of dividend. You can also, if you are careful, waive dividends but this is a difficult, complicated affair that you should not approach without advice.
Unmarried partners are caught by HMRC’s settlement rules if the gift is only a gift of income, revocable or into a trust for their benefit from which you can also benefit.
Practical Tip:
Your spouse’s shares in your trading company can benefit from their capital gains tax (CGT) annual exemption (currently £11,000) on a sale of the company, but won’t get the 10% entrepreneurs’ relief CGT rate unless your spouse owns at least 5% of the shares in terms of voting rights and ‘ordinary share capital’ and your spouse is an employee or office holder. They don’t have to meet any minimum working time requirement, but the employment must be genuine.
