With HM Revenue & Customs (HMRC) clamping down on tax avoidance, many couples that share their income need to ensure they are doing this legally and realistically. Therefore, it is important that you are aware of the areas that may come under scrutiny. HMRC will only scrutinise couples when they are actively and obviously organising their income to avoid paying tax. HMRC have also been clamping down on this area for many years due to long-standing rules; it is not a recent endeavour, despite what people may think.
There are three key ways in which you can share your company income with your spouse and these are the three main areas that come under scrutiny:
- Paying your spouse a salary
- Appointing your spouse a director and paying them fees
- Transferring shares to a spouse and paying them dividends
Paying your spouse a salary
If you pay your spouse a salary from your company, tax will be saved if your spouse actually does work for the company and is being paid a realistic amount for what they do. HMRC will only begin investigating if the salary is excessive. In this circumstance they can refuse a corporation tax deduction.
So long as your spouse is not overpaid, there is no need to be concerned.
Appointing your spouse a director and paying them fees
If you appoint your spouse a director you are entitled to pay them fees. Fees are treated the same as a salary, however, they do not have to be justified. Therefore, HMRC are not permitted to refuse a corporation tax deduction, unless the fees are noticeably disproportionate to the level of the company’s activity. To be safe, it is advised that you pay a similar fee to all of your directors. This will avoid HMRC seeing the arrangement as a sham intended to avoid tax.
Transferring shares to a spouse and paying them dividends
As long as your partner pays tax at a lower rate than you, then giving them shares in your company so you can pay them dividends is usually the most tax-efficient route to save tax and National Insurance. HMRC even confirmed at the beginning of 2013 that giving assets to your spouse to reduce your income or capital gains tax bill wasn’t an abuse of the tax rules. If you are concerned with the way your income is shared or would like some advice on whether there are ways you can organise your income more tax efficiently, please get in touch.