Dividends - adding my wife as shareholder

[dclark82]

This is my first post so apologies if this is been addresses before - I've tried looking at the dividend link to right of this page (Limited Company Dividends Guide :: Contractor UK) and have tried searching the forums here to no avail.

Go easy on me as I'm not fully conversant on what I need to be looking out for or what questions I need to be asking.

I have a private limited company that I set up in December 2015, and have yet to complete my first years accounts and will likely seek an accountant in early December to review my accounts. As such would like to explore adding my wife as a shareholder to the company and whether it is beneficial to do so.

I've read about the change in dividend legislation, and understand that contractors can now avail of a £5000 tax free dividend. I wondered if it was possible to add my wife to my company as a director so that the company can pay her an additional £5000 in dividends - she is in full time employment and receives no dividends currently.

I've found the following article and it seems to suggest that all I need to do is have my wife added as a shareholder. But it the article reads that she would have to be a contractor.

Any advice would be greatly appreciated.

[northernladuk]

This is my first post so apologies if this is been addresses before - I've tried looking at the dividend link to right of this page (Limited Company Dividends Guide :: Contractor UK) and have tried searching the forums here to no avail.

Go easy on me as I'm not fully conversant on what I need to be looking out for or what questions I need to be asking.

I have a private limited company that I set up in December 2015, and have yet to complete my first years accounts and will likely seek an accountant in early December to review my accounts. As such would like to explore adding my wife as a shareholder to the company and whether it is beneficial to do so.

That's your first mistake right there. The second word of tax planning is the key. You've admitted you don't know what to look for and don't know what needs asking so what makes you think you can get this far without an all mighty cockup or missed opportunities. Flailing about on an internet forum when you are dealing with 10's of K's of money is a pretty poor way to go about it. Get yourself an accountant straight away.

I've read about the change in dividend legislation, and understand that contractors can now avail of a £5000 tax free dividend. I wondered if it was possible to add my wife to my company as a director so that the company can pay her an additional £5000 in dividends - she is in full time employment and receives no dividends currently.

Your accountant can answer this.

[quote]
I've found the following article and it seems to suggest that all I need to do is have my wife added as a shareholder. But it the article reads that she would have to be a contractor.

And this is why you need an accountant.

Any advice would be greatly appreciated.

Get an accountant.

[teapot418]

You really do need to take your accountant's advice on this.

InTouch sent out a guide last week in their newsletter.

What are alphabet shares? | Intouch Accounting

[northernladuk]

You really do need to take your accountant's advice on this.

InTouch sent out a guide last week in their newsletter.

What are alphabet shares? | Intouch Accounting

That's a fairly positive article on Alphabet shares and waivers. I'm a little surprised it doesn't seem to reflect the general consensus to stay well away from them. I'd imagine a newbie contractor will read that, mentally tick the boxes and think they are OK.

[chopper]

I have a private limited company that I set up in December 2015, and have yet to complete my first years accounts and will likely seek an accountant in early December to review my accounts.

Why wait until December? If you ask an accountant in December 16 to prepare your company accounts for Dec15-Dec16, he will charge you a year's worth of fees for 15-16. So engage one now, or engage one in December after the company year end, it'll cost you the same.

The reason contractor accountants charge £100 a month is simply because they are £1200 a year, were just spreading the cost throughout the year.

[Lance]

That's a fairly positive article on Alphabet shares and waivers. I'm a little surprised it doesn't seem to reflect the general consensus to stay well away from them. I'd imagine a newbie contractor will read that, mentally tick the boxes and think they are OK.

I've used alphabet shares in the past when a director of a non PSC. Since then they have become not only frowned upon, but they are not covered by the Arctic Systems test case. Arctic Systems won, on appeal, based on the equal quality shares (I'm paraphrasing somewhat).
Don't touch alphabet shares with a bargepole if you're a PSC.

[TheCyclingProgrammer]

That's a fairly positive article on Alphabet shares and waivers. I'm a little surprised it doesn't seem to reflect the general consensus to stay well away from them. I'd imagine a newbie contractor will read that, mentally tick the boxes and think they are OK.

My understanding with alphabet shares is that the risk arises when different classes of share are used so that the lower rate paying shareholder (e.g. the non-working spouse) can take more dividends than the higher rate paying shareholder, disproportionally to the shareholding percentage, the risk being that the arrangement itself can constitute a settlement (over and above the original gift of shares, similar to how HMRC attack waivers).

With the new dividend tax, I guess people are going to be re-visting alphabet shares as a convenient way of limiting how much the lower paid shareholder receives without coming up with convoluted share percentages to make it work or making use of (arguably riskier) waivers.

The Intouch guide does seem to cover most of the relevant points, with probably the most important being that any alphabet shares should be ordinary shares of equivalent rank and sharing the same rights otherwise the gift (if between spouses or civil partners) itself would be caught by the settlements legislation by default.

[TheCyclingProgrammer]

Having said all that, whilst I can see alphabet shares being a useful way of only paying a spouse £5k to stay within the tax limit, its surely still more tax efficient and simpler to just give your spouse an ordinary shareholding (it doesn't have to be 50/50 - it could be 75/25) and split the dividends normally. Even if your spouse ends up paying some tax on the dividends (7.5% above the £5k limit + £11k personal tax allowance) its much less than you'd pay if you'd taken the dividends yourself and paid higher rate tax.

A 75/25 split would allow you to take the usual recommended salary (£8060 for this year) + dividends up to the higher rate threshold and distribute approx. £11k in dividends to your spouse without them incurring any further tax.

You could also make them a director or company secretary (essential IMO to ensure they are eligible for ER in the future under current rules) and pay them a nominal salary for this role. I'm not a big fan of paying the full personal allowance just for being a company officer but a couple of grand per year for being a company officer and a bit of an admin is reasonable IMO and would still mean your spouse incurs no further tax.

Under this arrangement you could have a combined take-home of just over £50k with the main shareholder paying just over £2k in income tax on their dividends.

Of course, if you engage an accountant they could be telling you all this in greater detail and helping you do it properly.

[missinggreenfields]

You really do need to take your accountant's advice on this.

InTouch sent out a guide last week in their newsletter.

What are alphabet shares? | Intouch Accounting

Which is the advice I used for my company - one class A for me, one class B for my wife. We both own 50% of the company.

[northernladuk]

Which is the advice I used for my company - one class A for me, one class B for my wife. We both own 50% of the company.

Oh dear.....