Additional Shareholders

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 the higher earnings threshold, but would like to be able to extract more of the retained earnings out of the company without having 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 to set this 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 known as income shifting and is currently still legal, although the Government has ear-marked this to change. 

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 as it is possible that HMRC might attack a scheme where this arrangement is used as a device for avoiding National Insurance.
• Dividends paid to shareholders need to be paid directly to the shareholder – it is really important that 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 that the company pays out needs to again be split between all shareholders, according to the portion of shares that they hold (regardless of the class of shares held). In order for shareholders to claim Entrepreneurs Relief they must also be an officer (director or company secretary) or an employee for 2 years, and hold at least 5% of the company.

For the 2020/21 tax year, the higher earnings threshold is £50,000. The tax rates are as follows;

• The Personal Allowance is £12,500 – This is the standard amount of income that you won’t have to pay tax on
• The first £2,000 of dividends are tax free
• Any dividends between £2,000 and up to the higher earnings threshold are taxed at 7.5% 
• Any dividends over the £50,000 threshold are taxed at 32.5%

Your partner does not have any other sources of income 

If your partner does not have any other sources of income (e.g. salary from PAYE employment, interest, rent, etc), then there may be a tax benefit for them being a shareholder in your limited company. 

Assuming your partner has no other sources of income in the UK for the tax year, if your limited company was to distribute £14,500 of dividends to your partner, there would be no tax payable.

Alternatively, if your limited company was to distribute £50,000 of dividends to your partner, they would pay £2,662.50 in personal tax on this income (£50k – £2k – £12,5k = £35,5k taxed at 7.5%). They would need to submit a personal tax return as they have received dividends above the £2,000 tax free threshold.

Your partner does have other sources of income 

If your partner does have other sources of income, then there may or may not be a tax benefit for them being a shareholder in your limited company.

If they receive only salary payments from employment, then you can pay them £2,000 with no tax implications.

If however, they receive dividend payments from any shares held etc, then you will need to reduce the dividend payments from your limited company so that total dividends received is less than, or equal to, £2,000.

Example 1 :

Tom has his own limited company and would like his partner, Meg, to be a shareholder in the company, so the company can pay her dividends. Meg earns £30,000 (Gross) a year through her permanent job, and has no other sources of income. 

There are 2 options here;

1. The limited company could pay Meg a maximum dividend of £2,000. This allows Meg to make use of the £2,000 tax free dividend allowance whilst still keeping her gross income below the higher earnings threshold. No personal tax return would be due in this scenario.
2. If Tom wanted to pay out further funds from his retained earnings and Meg is happy to pay some extra tax, then in this situation, there would only be a tax benefit if the limited company was to pay Meg a maximum dividend of £20,000. This would give Meg a total gross income for the year of £50,000. She would pay £1,350 in personal tax (£20k – £2k tax free dividends = £18k to be taxed at 7.5%) If Meg were to receive more dividends than this, she would have to pay 32.5% tax on any dividends received over the higher earnings threshold. A personal tax return would be due in this scenario.

Example 2 :

Meg earns £50,000 a year through her permanent job, and has no other sources of income. 

In this situation, the only tax benefit is for the limited company to pay Meg a maximum of £2,000 in dividends, maximising the tax free dividend allowance. The reason being, Meg’s total gross income already exceeds the higher earnings threshold, so any dividends she receives above this would be taxed as 32.5%.

IMPORTANT

1. 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.
2. Any dividend payments made to your partner must be used solely by them – we recommend you pay 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.

If you would like to arrange to have your partner set up as shareholder in your limited company, please contact us and we will arrange for his.