This guide provides details for adding your spouse to your limited company and highlights some of the key considerations.
Higher earning clients often find they have retained earnings building up in their company year after year. They pay themselves up to around the higher-rate threshold, but would like to be able to extract more of the retained earnings out of the company without significant tax implications. Currently, there are a number of options available, including:
- Set up a stakeholder pension fund for yourself. Your limited company can make contributions to the fund and it is tax-deductible for the company. If you would like this set up, we can put you in contact with someone who specialises in pension funds for limited company contractors.
- Set your partner up as a shareholder of the limited company and pay them dividends. This is often called “income shifting”. It can be legitimate where there is genuine share ownership, but arrangements can be challenged by HMRC under the settlements legislation if they are primarily designed to divert income without transferring real rights and risks.
Bear in mind:
- Another shareholder will now own part of your business.
- Each time you declare a dividend, all shareholders need to be paid a dividend according to the portion of shares that they hold. If a different class of share is gifted, different dividends can be declared at different times. Issuing different classes of shares can be useful; however, care should be taken because HMRC may attack arrangements where “alphabet” shares, dividend waivers or similar devices are used mainly to route income to a lower-taxed spouse.
- Dividends paid to shareholders need to be paid directly to the shareholder – it is really important these dividends do not find their way back to you, and you aren’t seen to benefit in some way from this arrangement.
- If/when you close down your limited company, the final distribution again needs to be split between all shareholders according to their shareholdings (regardless of class). To claim Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), a shareholder must usually be an officer or employee for at least 2 years and meet the 5% share/vote tests on qualifying disposals.
Key rates for 2025/26
For 2025/26 (6 April 2025 – 5 April 2026), the main figures are:
- Personal Allowance: £12,570. (Tapers away from £100,000 and is nil by £125,140.)
- Dividend Allowance: £500 tax-free per person.
- Dividend tax rates (on amounts above the £500 allowance): 8.75% (basic), 33.75% (higher), 39.35% (additional).
- Higher-rate threshold (England, Wales & NI): £50,270 total income. (Basic-rate limit £37,700 + Personal Allowance £12,570.)
Note: Scottish income tax bands differ for earned income, but dividend rates are UK-wide. The interaction can vary for Scottish taxpayers.
Your partner does not have any other sources of income
If your partner has no other UK income (e.g. salary, interest, rent), there may be a clear tax benefit to them being a shareholder.
- Using the Personal Allowance £12,570 plus the £500 dividend allowance, your company could distribute up to £13,070 of dividends to your partner with no tax payable (assuming no other income).
- If your company were to distribute £50,000 of dividends to your partner, the tax would be: £50,000 − £12,570 − £500 = £36,930 taxed at 8.75% = £3,231 (rounded). Because total dividend income exceeds £10,000, a Self Assessment return is required.
Your partner does have other sources of income
If your partner does have other income, the benefit depends on how much basic-rate band remains.
Example 1:
Tom has his own limited company and would like his partner, Meg, to be a shareholder so the company can pay her dividends. Meg earns £30,000 (gross) in a permanent job and has no other income.
There are 2 options here;
- The company could pay Meg dividends up to the £500 dividend allowance with no dividend tax. (If dividends stay within the £500 allowance, there’s nothing to tell HMRC.)
- If Tom wanted to pay out further funds and Meg is happy to pay some extra tax, then to stay within the basic-rate band, Meg could receive up to £20,770 of gross dividends in the year (this keeps her total income at £50,270). Tax would be £20,270 × 8.75% = £1,774 (rounded), because the first £500 falls within the dividend allowance. If her total dividends exceed £10,000, a Self Assessment return is required.
Example 2:
Meg earns £50,000 a year through her permanent job, and has no other income.
In this situation, the only clear benefit is for the company to pay Meg up to £500 in dividends tax-free (the dividend allowance). Anything above that generally pushes her over the £50,270 higher-rate threshold. Roughly the next £270 (after the allowance) would be taxed at 8.75%, and amounts beyond that at 33.75%.
IMPORTANT
- While we can give you advice and help you work out the appropriate level of dividends to distribute from your limited company, it is your responsibility to track the payments the company makes to your partner.
- Any dividend payments made to your partner must be used solely by them – we recommend paying the dividends into their own personal bank account. Do not use your partner as a way of extracting dividends from your company that eventually end up finding their way into your hands.
- Be cautious with different share classes and dividend waivers – HMRC can invoke the settlements rules where arrangements look like a device to divert income. Get advice first.
If you would like to arrange to have your partner set up as a shareholder in your limited company, please contact us and we’ll arrange this for you.