Dividend Advice

[Frog Morton]

Hi Guys, hoping for some advice……

Shortly be setting up Ltd Co with myself and spouse as joint equal shareholders.

I will also be shortly receiving a redundancy payment, a significant amount of which will be liable to income tax. This will take me well into the 40% tax bracket, even though new tax year has just commenced. Therefore, I believe any dividends I draw for myself will be subject to 32% tax, but my wife’s dividend allocation will in affect be tax free, as she will be earning very little.

Can I therefore draw dividends and allocate to just one shareholder (i.e. the wife), even though we are equal shareholders? Think the answers no, but seeking clarity.

[Alan @ BroomeAffinity]

The answer's NO. Unless you vary the shares so that one class of share receives a dividend and the other doesn't. Not to be recommended in the current climate as HMRC would see right through it. Might be argued that it is an extreme extension of Income Shifting so you could maybe get away with it until next year. Proceed with caution though.

[malvolio]

Redundancy payments are not taxable though...

[MrRobin]

Redundancy payments are not taxable though...

They are if they're over a certain amount... £40k or something I think.

[ASB]

Can I therefore draw dividends and allocate to just one shareholder (i.e. the wife), even though we are equal shareholders? Think the answers no, but seeking clarity.

Yes you can. You need to produce a dividend waiver and send it to the company. There is probably a template available.

However whether this is wise or not depends upon your attitude to risk. Whilst it is perfectly legal etc HMRC may see this as a settlement under S660. The circumstances in which they do this vary, one trigger is often that the level of final dividend could not have been paid to all shareholders (effectively if the company retains it then that is usually considered OK but if it is paid to the other shareholders then they may consider it a settlement).

You give no indication of likely levels of dividends, that impacts how you should proceed.

If < 40k then you could waive, pay 'em all to your wife and hope for the best. Alternatively you could gift your shares to your wife and pay, then she gifts them back to you next year. Again find out what your accountant thinks because there are potential S660 implications here anyway.

If the level was say 80k then all you could really do was waive and retain your portion anyway, unless you accept you wife going into the higher rate bracket (in which case you might as well be paying them yourself).

[ASB]

They are if they're over a certain amount... £40k or something I think.

The first 30k is tax free - except when it is a contractual payment in which case it is all taxable.

[malvolio]

The first 30k is tax free - except when it is a contractual payment in which case it is all taxable.

Which was actually my point, a contractual payment for loss of your job isn't a redundancy payment.