I'm hoping to have some clarification on whether I am interpreting the new dividend tax rules correctly when trying to configure the most tax effective way for my husband to extract the companys profits. I am an accountant but I only generally do small sole trader/partnerships, I used to do companies years ago but my hubbys accounts are the only company ones I do now, so haters please don't slam me for asking this question, I do not inflict my company tax expertise (or lack of!) on any clients, this is purely a question for ourselves
I have come up with the following scenario, which I think will work the best, if anyone could confirm if they agree or not, and give some feedback it would be most appreciated. If it is a good plan (which I'm pretty sure it is) it will hopefully be useful to others looking to maximise their tax savings too
Here goes (I will talk in the 3rd person)...
Single director company, husband is currently 100% shareholder with pre tax profits of £30k-£40k per year. He goes out and does all of the work and his wife is genuinely heavily involved doing all the office work, book-keeping etc. She has never been a shareholder or been paid a salary as she has her own self employed business which uses up all of her PA, and under the old tax rules he was always a basic rate tax payer so didn't pay any tax on his salary and dividends anyway. He used to pay a salary up to the PA and the rest in dividends. This cost him a bit of employee NI, but no employer NI as he had the £2000 exemption.
For 2016-2017 onwards, after recently attending a tax update course which the lecturer brought out some useful thoughts, I am proposing the following:-
1. Reduce husband's salary down to £8000, this will save him a total of over £700 employee and employer NI (since single directors companies now aren't eligible for the £3000 exemption). It will also leave £3000 spare PA that can be used against extra dividends, in addition to the £5000 allowance.
2. Make wife a 40% shareholder for 3 reasons -
- So as to utilise wife's £5000 of dividend allowance
- 40% shareholding leaves more control to the husband which is fairer than going 50/50 given the circumstances of the company, where he is more involved in generating the income
- 60% shareholding for husband means he can take extra dividends than wife, and based on the salary outlined in point 1, this happens to be the near perfect split to maximise his spare PA.
If I am seeing this all correctly, the numbers would stack up as follows:-
Husband
£8000 Co Salary
£0000 Other job Salary
£8000 Total earnings all below PA & NI limit so tax free
£7500 Dividend income (60% shareholding of £12500 distributed)
-£3000 wiped out by spare PA
£4500
-£5000 dividend allowance
£0 taxable
Wife
£0000 Co Salary
£11,000 Self-employed income
£11000 Total earnings all below PA so tax free
£5000 Dividend income (40% shareholding of £12500 distributed)
-£5000 dividend allowance
£0 taxable
If I have this right, it means the company has £20,500 of post tax profits (£12,500 dividends + £8000 husband salary) that can be extracted totally tax/NI free. Which on a company of this size is pretty good way of getting most of the annual profit out of the company, and then have the option of paying a little bit of extra tax at the 7.5% if they want to extract the rest.
Any comments/constructive criticism would be very welcomed.
Thanks in advance
