Contractors' Questions: Am I caught by income-shifting legislation?

Contractor’s Question: As a company shareholder, I plan to pay myself a normal PAYE wage instead of any dividend and also pay my wife (who has no shares) a PAYE wage, with the effect we would both be kept under the 40% tax bracket. Would this be caught by the income-shifting legislation?

The thinking behind this is due to April’s changes to dividends there is less advantage from paying dividends and by paying a wage and full PAYE, the income left over can all be put into pensions instead of paying corporation tax.

Expert’s Answer: Assuming your company earns its income from providing your services to clients, there should be no concern in the company paying you a salary, and making contributions to your pension, if you ultimately decide that this is the best and most tax-efficient way of getting funds out of the company.

As an aside, it is worth pointing out that whether this approach will be tax-efficient will depend on how the tax payable under this approach (income tax and National Insurance Contributions) would compare with the tax that would be payable if funds were paid out as dividends (corporation tax in the company and the income tax on dividends – assuming of course that you are not caught by the ‘IR35’ rules). Income tax is only charged on dividends after the deduction of the new Dividend Allowance, and even then at lower rates than on other income, and so clearly you will need to crunch the numbers to make a decision on this point.

If your wife acts as a director of the company, or otherwise carries out services for the company (such as administrative or other support services), the company could be justified in paying her a salary for these services and in making pension contributions on her behalf.

Any salary paid to your wife should, however, be commensurate with the nature of work that she does for the company and the time she spends doing this. If your wife were to receive more than a commercial salary, the excess could well be attributed to you and subject to tax in your hands.

Similarly, if the company were to make pension contributions on behalf of your wife that were more than could be justified on the basis of your wife’s role and salary, the excess could be regarded as part of your employment package, giving rise to a taxable benefit in your hands.

For a number of reasons therefore, you would need to think carefully before seeking to use this route as a tax-efficient way of extracting funds from your company.

The expert was Andrew Constable, tax partner at chartered accountancy firm Kingston Smith LLP.

Thursday 14th July 2016