Dividends are a simple way for business owners to share profits, especially in family-run businesses. Paying dividends to a spouse, known as spousal dividends, is a popular tax planning strategy. It can lower the family’s overall tax bill, but it must be done correctly to follow UK tax laws. This guide explains how to use spousal dividends wisely and avoid costly mistakes.
Spousal dividends mean paying part of the company’s profits to a spouse who owns shares. By splitting income between both partners, families can make the most of personal allowances and lower tax rates. While this can save money, it’s important to follow the rules to avoid problems with HMRC.
Ensure Genuine Share Ownership
The spouse must actually own shares in the business.
The shares should be issued properly and for valid business reasons.
Use Tax-Free Allowances and Lower Tax Rates
Everyone has a personal allowance of £12,570 (for 2024/25) before paying tax.
If your spouse has little or no income, dividends can be taxed at a lower rate of 8.75%.
Use Alphabet Shares for Flexibility
Alphabet shares let you control how much dividend each person receives.
This helps adjust payments to suit your family’s tax situation.
Keep Proper Records
Always document the issue of shares and dividend payments.
Use board meeting minutes and other records to show the arrangement is genuine.
Review Income Levels Regularly
Check both partners’ incomes to make sure neither is pushed into a higher tax band.
Breaking the Settlements Rules
HMRC may tax the dividends back to the main shareholder if the arrangement isn’t genuine.
Ensure your spouse owns the shares and actively participates in the business if possible.
No Real Share Ownership
If the spouse doesn’t truly own shares, HMRC could disallow the dividends.
Make sure the shares come with real rights, like voting or profit entitlements.
Exceeding Tax Thresholds
Giving too much dividend to your spouse may push them into a higher tax band.
Plan the payments carefully to avoid unnecessary taxes.
Impact on Benefits and Allowances
If your spouse earns over £50,270, it could reduce child benefit payments.
Earnings above £100,000 mean losing the personal allowance, which increases tax.
Dividend Allowance is Low
The tax-free dividend allowance is now only £500 (2024/25). Plan payments to avoid surprises.
Scenario: John owns a small business and earns £120,000 in profits annually. His wife, Sarah, has no income. John transfers 30% of shares to Sarah.
Result:
John keeps 70% of the profits (£84,000) and pays dividends on this amount.
Sarah receives 30% (£36,000) and uses her personal allowance and lower tax rates.
This saves the couple over £5,000 in taxes compared to John taking all the dividends alone.
Get Expert Advice: Every family’s situation is different. An accountant can help you create a plan that works for you and follows the law.
Stay Updated: Tax rules change often. Regular reviews ensure your strategy stays effective.
Consider Long-Term Goals: Think about how share ownership and dividend payments will affect your family’s future finances.
Spousal dividends are a smart way to save money on taxes, but they need to be handled carefully. By following the tips above and avoiding common mistakes, you can take full advantage of this strategy while staying compliant with UK tax laws.
At Breaking the Mould Accounting Ltd, we specialize in tax planning for families and businesses. Contact us today to learn how we can help you optimize your finances and stay compliant with HMRC rules!