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Hi again.If you set up a company with your wife as the sole shareholder while you do the work as a director for no reward, HMRC will almost certainly take a close look at it if a keen eyed tax official spots the odd arrangement and may try to attack it using settlements legislation though they have failed in the past in situations where a spouse does none of the work but takes a 50% stake in the company. To have a 100% non-active shareholder will be a like a red rag to a bull I fear.There was a first tier tax tribunal case earlier this year where there were four shareholders, two husbands and their wives. They played around with dividend waivers to minimise higher rate tax exposure for ten years until a sharp eyed HMRC tax official spotted what was going on and the investigation began. HMRC won at the tribunal on the basis that the reasons given by the shareholders for their behaviour were not credible, given how long it had been going on when the real reason was avoiding tax through a somewhat bizarre arrangement.Assuming you went ahead, if your wife earns £36,000 post payslip pension contribution, the first £10,000 will be tax free and she will pay tax on £26,000 at 20%. That leaves her with £5,865 of her 20% tax band, If the company made a profit of, say £50,000, it will pay corporation tax at 20% (£10,000) which will leave distributable profits of £40,000.A £40,000 dividend would carry a notional 10% tax credit making it £44,444 gross for tax purposes. Of that £5,865 will be taxed at 10% (£586.50) and £38,579 will be taxed at 32.5% (£12,538.18). The gross liability will be £13,124.68. From that you deduct the 10% tax credit of £4,444.44 to leave a net liability of £8,680.24.I hope this helps but let me know if you have nay further questions.
Thanks for that.
Therefore,what would be the most tax efficient way of me proceeding without causing any suspicion with HMRC that what I am doing is extremely dubious?
I was hoping there would be a legitimate way to avoid me losing my personal tax allowance? Would it be better if I made myself 1/3 share holder which would probably still allow me to avoid losing my personal allowance
I forgot to add, in the above scenario of 50K profits, would the overall tax liability be £18,680.24 (i.e. approx 37% tax rate)
That's correct. The corporation tax liability would be £10,000 and the personal tax liability would be £8,680.24.