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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I work in the public sector and have a salary of approximately

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I work in the public sector and have a salary of approximately £96K/year from which I pay approx £13K into a final salary pension scheme.
I am going to be doing some private work and anticipate that I will earn 45-55K per year and as I understand, I will lose all of my personal allowance on a tapering basis from 100-120K. Would it be a much more tax efficient way (but completely legal) if I set up a limited company with myself as director and my wife as sole shareholder and pay her a dividend of approximately 3.5K per month. She also works in the public sector and earns approximately £36K per year of taxable income (ie after her pension contribution is deducted)What taxation rate would she have to pay on the dividend. Many thanks. Graham
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

I'm taking a look at this now.
Expert:  TonyTax replied 2 years ago.

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.

Customer: replied 2 years ago.

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

Thanks

Expert:  TonyTax replied 2 years ago.
There is nothing you can do to hide it, so to speak. You wouldn't be doing anything illegal. To HMRC it would smack of aggressive tax avoidance though you could argue that not much is being lost in terms of higher rate tax as your wife earns a high salary and will pay alt of tax on a £40,000 dividend. A copy of your accounts will have to be sent to HMRC with the corporation tax return and they can find out who the shareholders.

There is no certainty about what action if any HMRC will take or attempt to take. They may never pick it up though with their trawling software, it's a good possibility. Usually, spouses have 50:50 shareholdings and have no problems but you could try 1/3rd. It's impossible for me to predict whether you will ever have a problem or not.

To keep your income under £100,000, you can pay pension contributions or make charitable donations.
Customer: replied 2 years ago.

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)

Thanks

Expert:  TonyTax replied 2 years ago.

That's correct. The corporation tax liability would be £10,000 and the personal tax liability would be £8,680.24.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15755
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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