How We Helped a Married Couple Save £9,500 a Year in Tax
The client
John and Linda are a married couple running a successful limited company generating annual profits of approximately £120,000.
John was the main shareholder and was extracting profits from the company through a combination of salary and dividends.
Linda was also actively involved in the business, carrying out administrative duties and taking responsibility for much of the company's bookkeeping. Despite regularly working in the business, Linda wasn't receiving a salary.
When we reviewed their overall position, we identified an opportunity to make their remuneration and share structure significantly more tax efficient.
The problem
Because Linda wasn't being paid for the work she was carrying out, her available tax allowances weren't being fully utilised.
At the same time, a significant proportion of the company's dividends were being paid to John, with some falling into the higher-rate dividend tax band.
The existing structure wasn't making the best use of John and Linda's individual tax positions.
What we recommended: putting Linda onto the payroll
As Linda was genuinely working in the business, we recommended introducing a salary of £12,570 per year for the work she was carrying out.
This allowed the company to recognise and remunerate Linda for her role in the business while making better use of her available personal allowance.
Having a second qualifying employee also meant the company could meet the relevant conditions to claim the Employment Allowance, reducing its employer's National Insurance liability.
The salary also represented a cost to the company, subject to the normal Corporation Tax rules.
What we recommended: introducing alphabet shares
We also reviewed the company's share structure. Linda became a minority shareholder, with the company using alphabet shares to provide greater flexibility over future dividend distributions.
Rather than paying the majority of the company's dividends to John, some dividends could then be paid to Linda where appropriate.
This allowed John and Linda to make better use of their respective tax bands and reduced the amount of dividend income John was receiving at the higher dividend tax rate.
Any dividend distributions still needed to follow the company's share rights, distributable-reserve requirements and the relevant company and tax rules.
The result
These were relatively straightforward changes, but together they had a significant impact.
By paying Linda a salary for the work she was already carrying out, enabling the company to qualify for the Employment Allowance, making Linda a minority shareholder, and restructuring how future dividends were distributed between John and Linda, we calculated an estimated annual tax saving of approximately £9,500, based on their circumstances.
John and Linda didn't need to change how they ran their business. They simply needed a remuneration and ownership structure that better reflected how they were already operating.
The bigger lesson
It's common for both spouses to contribute to a family business while only one is formally receiving most of the income.
Where a spouse genuinely works in the company, reviewing salary, share ownership and dividend distributions can identify opportunities to improve the family's overall tax position.
The appropriate structure will depend on the work each person performs, their wider income, the company's circumstances and the rights attached to any shares.
Could your family business be structured more tax efficiently?
Our Tax Health Check looks beyond the company's year-end accounts. We review areas including directors' salaries, spouse remuneration, shareholdings, dividends, pensions and profit extraction to identify opportunities to make the overall position more tax efficient.
If your spouse works in your business or most of the company's profits are currently being extracted by one person, it may be worth reviewing whether your current structure is still the most appropriate.