Dividends versus PAYE

[JJ]

Re: Profit

I am just about to start on my first contract. My husband and I (where have I heard that before) are both directors of our company.
I am not sure if my contract is caught by IR35 or not.
At the moment I am the only one earning any income, what are the implications if I split my income into 2 'salaries', 1 for me and one for my husband ?

[silicondale]

s660 and IR591

In a husband and wife company, where only one is the 'fee-earner', then splitting salary to reduce tax can be attacked by the Inland Revenue under section 660.

If you're caught by IR35 there's no benefit in splitting salary anyway, as it will all be your deemed salary, and will pay tax and NIC on that basis.

If not caught by IR35 then you may do best to pay small salaries (up to the personal allowance level or a little over) and the remainder as dividends.

There is a current s660 case (Arctic Systems) which I think is soon to come to court, in which the Inland Revenue are claiming a total of £42,000 in tax going back six years. It's a new interpretation of old legislation and highly controversial. There are possible ways around it - for example by holding all the shares in joint names and claiming an automatic 50/50 split under s288 (just like happens on interest paid from joint bank accounts) - but none of these have been tested in court under the IR's new interpretation of s660.

In any case, both s660 and IR35 itself may become less important or even irrelevant in April, depending on what is implemented for "IR591". So you'll find right now that it's unlikely even your accountant could give you any meaningful advice on what to do for the best.