Marriage Allowance and Family-Owned Companies

The Marriage Allowance scheme allows you to reduce your tax bill by up to £230 in the tax year.

But is that the best way to handle your tax affairs if you’re a self-employed director in a family-owned firm? Smart Team investigates…

 

What is the marriage allowance?

If you or your partner was born before 6 April 1935, the scheme does not apply to you but you could be eligible for Married Couple’s Allowance. This scheme can cut your tax bill by between £326 and £844.50 a year – click <a href=”https://www.gov.uk/married-couples-allowance”>here</a> for more information.

For those in marriage or civil partnerships where both were born on the 6 April 1935 or later, you can transfer £1,150 of your personal allowance to your husband, wife, or civil partner if they earn more than you (up to £45,000 except in Scotland where the upper limit is £43,000). The lower earning member of the couple must earn £11,500 or less during the year. Your household could save up to £230 with this allowance per annum.

To apply for Marriage Allowance, click <a href=”https://www.gov.uk/apply-marriage-allowance”>here</a>.

But, before you do that…

 

Up to £230 saving in tax? That’s not much to get excited about.

On that, you won’t hear any disagreement or opposition from us.

The vast majority of people reading our blog will be self-employed directors – basically, people with their own companies who do a self-assessment every year.

There are ways to save a lot more money on your tax if you’re a married couple or in a civil partnership and you both own shares and are employees of the company.

 

If your spouse or civil partner is already a shareholding director/employee…

You can take advantage of both your personal allowance and your dividend allowance (equivalent at the time of writing to £16,500 per person). This means, save a bit of National Insurance Employees’ Contribution, you can bring in £33,000 to your home without paying tax.

There’s also the employment allowance to think about. You can claim the first £3,000 of employers’ secondary Class 1 National Insurance against your payroll. Get in touch with us about this because both the employers’ and employees’ National Insurance (12% + 13.8%) payable on further salary payments will be less than the 19% tax you pay on corporation tax on profits distributed in the form of dividends. Let us work out which is better for you.

Smart Team tip – the employment allowance is not available to companies with one director and no employees on the payroll.

Please be aware that HMRC do make occasional checks to ensure that both partners work actively within the business and that, should they decide that that is not the case, you may become liable to pay tax on your partner’s income from the business at a salaried level.

 

You can use share types to create different dividend levels

For most companies, shares are split equally between owners. That means dividends must be split equally too (unless you ask us to produce a minute for your board meeting where the shareholder receiving proportionately less waives their right to the underpayment).

You can also create “A” and “B” shares. With this arrangement, you can declare different dividend levels for difference classes of shares. So, if you are the major earning partner, you can allocate yourself “A” shares with “B” shares going to your spouse or civil partner.

This can prove helpful when one shareholder has income from somewhere else which eats up their dividend allowances and where the other has not used up their individual dividend allowance yet. The shareholder with available dividend allowance could own “A” class shares and the other with no remaining allowance could hold “B” shares. The “A” class shareholder, in this situation, could receive a higher dividend pay-out to make full use of their allowance meaning that the dividend tax paid by both parties averages out lower.

Smart Team tip – dividends can only be paid out against retained profit, not project profit.

 

Get in touch for more help

Ask Smart Team for help on 01202 577500 or email info[email protected]

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