Saving on your Tax bill as a Contractor

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No one likes their tax bill, in fact almost everyone would jump at a chance if they could find a way to reduce it. 

The trouble is if you are operating a limited company it seems to be becoming harder and harder not to have to fork over sizeable amounts of your income to HMRC. 

There is the dividends tax, the potential block on tax relief on T&S expenses and the removal of NI Employment Allowance for single director companies. 

Some contactors are starting to ask – should I make my spouse a shareholder?

Before looking at the wisdom of this choice first let’s explore the situation as it currently stands. 

Prior to April 2016 you could take a salary upto to the personal allowance and a gross dividend up to the basic rate band which would result in zero tax liability.  Now however under

the same scenario you would owe HMRC the grand sum of just over £2000. 

Ok so what about giving a gift of shares to a spouse?

First thing is that it must be an outright gift.  You cannot simply create a special class of shares with no rights except to the dividend. 

While HMRC has argued shares should be taxed if given to a spouse as the are no more than a right to income the House of Lords disagrees saying that such shares confer both voting rights and the right to participate in the distribution of assets on the winding up of a company along with the ability to block a special resolution. 

Presently though it is still possible for contractors to transfer shares carrying full rights to their spouse.  They will not fall foul of Settlements legislation and transfers between spouses are exempt from capital gains tax. 

There should however be a note of caution about gifts of shares to parties other than a spouse in that once shares have been transferred they are very difficult to get back.  If given as a gift it is recommended that shares are transferred in conjunction with a signed shareholder agreement. 

Overall the answer to the question depend very much on the level of income received by each party.  The best scenario wherein to transfer a dividend would be if your spouse had no other source of income.  Interestingly if you have children who are at University this could be a perfect way in which to fund their education as they are eligible to receive £5000. 

If you are determined to really save on your tax bill though you can transfer your partner shares thought this must be an outright gift and we suggest taking professional advice just so you are absolutely sure of the arrangement you are getting into. 

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