What’s this all about?
Everyone wants to save tax, right?!
For those of you who are legally married or in civil partnerships, there are some extra ways available to you to save tax!
If you own and run your own Company, I guarantee you have either heard about this, or at least thought about it yourselves at some point.
We are here today to finally clear it all up and explain how it works. Lets’ crack on!
What ways are available to save tax through my spouse?
There tend to be 4 main ways to reduce your tax bill by using your husband or wife:
- Salary
- Dividends
- Capital Gains Tax
- Gifts
Point: Before we get in to these in more detail, the main message here, is that for a lot of these to actually save you tax, your partner must not be earning their own income, or, being earning much less than you.
1 – Salary
If you own a business and operate a PAYE scheme (payroll) this could be the simplest route to tax savings.
Firstly, your partner like everyone in the UK are likely to get a personal allowance. If unused, this is wasted! By providing them with a salary on your payroll for work such as admin help, you are using up this tax-free allowance – currently £12,500. Why not reduce your own salary, and instead pay your partner?
The 2nd benefit of this, is you are ensuring that they are getting their NI stamp towards their state pension. This is vital if they have no other income sources!
2 – Dividends
If it is a Limited Company that you operate, dividends could be another route to saving tax.
For the current tax year, we all still have a dividend allowance of £2,000 per year, meaning no tax to pay on dividends up to £2,000 each April to April. This can be as well as the salary per point 1 above.
Therefore, this could total £14,500 of income at no tax (and just minimal NI to pay) going to your spouse instead of being taxed in your name.
If you both do this, that is a total of £29,000 of income with no tax and minimal NI.
Careful – as with our previous blog, dividends can only be paid if there are profits to pay from. If no profits = no dividends.
After the £2,000 dividend allowance, tax is at just 7.5% within the basic rate band (£37,500 for 20/21). You could consider paying more to your spouse if within the basic rate band, more so if they are being taxed at higher rate in your own name!
Check shareholdings at Companies House – it will depend on the percentage of shares you/your spouse own in the Company, as dividends should be paid at this percentage to each of you.
3 – Capital Gains Tax (CGT)
If you come to the point of selling your Company, then on the sale of the shares, the CGT should be reduced to just 10% tax (using Business Asset Disposal Relief – formally known as Entrepreneurs relief).
The “lifetime limit” has now been reduced to £1m for any disposals on or after 11th March 2020.
However, each persona has their own limit of £1m each, and therefore could be VERY beneficial in these circumstances.
The full rules & details of Business Asset Disposal Relief are too complex to discuss here, but the main points of it are that the person must be an Employee of the business, and hold at least 5% shares in the Company for at least 2 years prior to sale. Don’t get caught out by this part of the rule!
4 – Gifts
Finally, gifts!
As mentioned above, dividends must be given per the shareholder percentage. If your shareholding needs to change, you can “gift” shares to your legal spouse completely tax free!
This will then allow you to make use of all the tax saving ideas above, as well as any reliefs available.
Important points to remember!
All of the information above tends to be on the assumption that there are sufficient profits available in the Company to take dividends. Remember, you cannot take a dividend if there are no profits to take.
It also presumes that your spouse has no other sources of income. If they are already in the higher rate tax bracket, then well these points might not actually help you all that much! Don’t forget that the Tax Return Deadline is 31/01/2021, find out more at our blog.
Always talk to your Accountant first. Better yet, make Bristol Accountant’s Steele Financial your Accountant!
Conclusion
So to finish off, a reminder, that if you are legally married/partnered with someone, there could be lots of opportunities to reduce your tax bill and “spread the load” of income between the two of you!
Above are just a handful of examples, but a good Accountant will be able to look at your personal scenario and give clear guidance.
Get in touch!
If you have any questions on the above or want our help to reduce your tax bills, contact us today and book into a free consultation.
