Income splitting question

[Reporter]

I have a Limited Company and am thinking about income splitting with my wife. My wife currently has zero income.

If my wife receives say £10k dividends from my company and she then earns say £5k in her own right in another job, would this £5k earning be counted as part of her Personal Tax Allowance (£6475 this year) and therefore be tax free?

Thanks

[xoggoth]

Yes. Dividends are considered tax paid (CT has been paid on the amount already) and are not included as salary. Only taxable for higher rate earners.

[Reporter]

Thankyou.

Another question: Assuming she recceives £10k dividend and earns
£5k (which will be tax free), if she has a savings account that earns her, say £1k, can she claim the tax back on this (because £5k + £1k is still less than the £6475 personal allowance) or does the £10k dividend get included in this and count as income?

[biggles_1]

I have a Limited Company and am thinking about income splitting with my wife. My wife currently has zero income.

If my wife receives say £10k dividends from my company and she then earns say £5k in her own right in another job, would this £5k earning be counted as part of her Personal Tax Allowance (£6475 this year) and therefore be tax free?

Thanks

This has been spoken about a fair bit in the last few weeks it seems:

http://forums.contractoruk.com/accou...e-holders.html

http://forums.contractoruk.com/accou...e-options.html

Why stick to only 10k? If there is more available and you are going to assume it's OK you may as well go the whole hog and max her allowances.

J.

[lje]

Thankyou.

Another question: Assuming she recceives £10k dividend and earns
£5k (which will be tax free), if she has a savings account that earns her, say £1k, can she claim the tax back on this (because £5k + £1k is still less than the £6475 personal allowance) or does the £10k dividend get included in this and count as income?

No. The £10k will be counted as income - all be it with no extra tax to pay on it (for lower rate tax payers). Although if she does a tax return perhaps she'll get a bit of money back because she's already paid tax on the dividends but has some tax free allowance left? I'm not sure on that one.

[Steven@Parasol]

If the £5,000 is the only source of income that you wife earns during the year then no tax should become due, as it will be covered by her personal allowance. However, HMRC look at income from all sources and will determine if any further tax is due. Given it is so early in the tax year (started 6 April) it is likely that other income could be earned.

If you wife is receiving the £5,000 via a payroll then initially tax will be deducted. Your wife should have a Code Number – essentially this tells the payroll processor how much tax to deduct. The Code Number will allocate your wife her Personal Allowance on a monthly basis. Therefore, if she was paid in April she would receive 1/12th of her annual allowance. Therefore, some tax would be deducted now. The tax would be repaid either on submitting a tax return (after 5 April 2011) or later on in the year if she received further income.

It can be bit complicated but if you'd like me to get someone to talk you through it PM me.

[ASB]

No. The £10k will be counted as income - all be it with no extra tax to pay on it (for lower rate tax payers). Although if she does a tax return perhaps she'll get a bit of money back because she's already paid tax on the dividends but has some tax free allowance left? I'm not sure on that one.

If it is interest then it is reclaimable, it is never reclaimable from dividends. It is a mistake to try and compartmentalise it. Her actual gross income is:-

5,000 salary
11,111 dividends (inc tax credit)
1,000 (say) savings income

Total 17,111

The tax calculation is then applied to this, however the assorted credits will in fact offset the overall liability. The IR tax return will enable you to bung all the numbers in and have it do the calculation for you then not submit it.

If she has no other income then it is sensible to pay her as a salary an amount to use her personal allowance. Check the amount needsed, this will also get a years pension credit (at no NI cost if you get the numbers right - can't remember exactly what they are). This is potentially important from a view of state pension.

[Reporter]

Thanks for all the responses.

Just to clarify:

If she earns £5k as a sole trader during the year in her own right, she pays no tax.

If in addition she also receives £10k dividend from my Ltd Company, then the £5k she earned as a sole trader all becomes liable for tax.

Is that correct?

[ASB]

Thanks for all the responses.

Just to clarify:

If she earns £5k as a sole trader during the year in her own right, she pays no tax.

If in addition she also receives £10k dividend from my Ltd Company, then the £5k she earned as a sole trader all becomes liable for tax.

Is that correct?

Yes, and no.

The dividend is counted as "basic rate paid". The affect of what you say is that she has a total assessable income of 16,111 (there would be 1,111 tax credit associated with the dividend).

All income received is taxable - but there are allowance and credits. In the example you give she would pay no additional tax. I can't be bothered to do the actual tax calculation because you can easily enough do it using the self assessment return on HMRC and not submitting it or using any other return preparation software.

In simplistic terms:-

- The 5k is less than her personal allowance. This attracts tax at 0%
- The dividend attracts tax (in her circumstances) at the basic rate. The tax credit associated with the dividend discharges this liability.
- Although the dividend is treated as basic rate paid this is not reclaimable (in effect say you reeived dividend of 5k and not other income whatsoever the associated tax credit is not reclaimable).

As a general principle you will not pay tax on dividends (grossed up by 10/9 - the 1/9 being the 'credit') if the total income from all sources is less than about 40k (i.e. ones tax free allowances plus the basic rate band).

This is probably as clear as an opaque thing.