Directors, use your spouse’s dividend allowance while you still can

There’s quite a bit of talk about potential tax changes that could affect contractors at next quarter’s Autumn Budget 2025.

That’s even though those changes aren’t formal proposals, and even though one of the possibilities -- removing the £500 tax-free dividend allowance -- wouldn’t cost contractors an awful lot anyway.

Dividends uncertainty is diverting contractor-directors’ attention

However, I’m noticing limited company directors not always making the best use of the existing tax landscape, never mind what may or may not be coming down the pipe in the event that the chancellor changes her mind and wants Autumn Budget-sized tax increases.

I will keep on the same topic though, because, with dividends, if you’re running a limited company, adding your spouse as a shareholder can be a smart way to make use of their unused basic rate band to reduce the total tax bill on your income, writes Michael McCullion, the founder and director of Bright Ideas Accountancy.  

What does ‘spouse’ mean when adding a company shareholder?

But by “spouse,” above, I do generally mean a married person such as your husband or wife. The key is the spouse exemption for gifts, as thanks to this, contractors can gift shares within their business without any tax implications.

If it’s your ‘live-in partner’ (distinct from a civil partner for whom the spousal exemption applies) that you wanted to make a shareholder, then they would have to pay the market share value to purchase such shares.

Making partners company shareholders: further considerations

Another consideration is that while it may be possible or even helpful to make such a partner a shareholder at the very start of your limited company’s formation, they would still legally own that percentage of your company in the unfortunate event of a break-up!

Some of us change our partners like our socks! And that’s fine, of course, but it is not recommended that shareholdings be changed often without a viable business reason. 

For dividends, your shareholder-spouse need not do any work for your company

Interestingly, with your spouse, though, and when it comes to dividends, they don’t actually need to do any physical work once your company appoints them as a shareholder. (N.B. With salary from the company, it’s a different matter, and a different subject for another day, as it requires an exploration of the Arctic Systems case).

But as said at the top, you’ll need to be confident if you want that them to tax-efficiently receive dividends, that your spouse has no other income, or low income.

What is ‘low income’?

Well, we say "no income" or "low income" because should your spouse already have income that is utilising the basic rate band, then you may find yourself simply shifting the tax liability from yourself to them!

And in turn, now having the requirement to complete a self-assessment tax return.

What do I mean by “low income?” I mean income that is less than the basic rate band (including the tax-free personal allowance  of £12,570), which would be a total of £50,270. So if your spouse’s income is lower than £50, 270, it means dividends up to this amount can be taken at the basic rate of 8.75%. As an example, if your spouse has a salary of £30,000, then this would leave £20,270 that can be utilised at the 8.75% tax rate.

Up to £500 in tax-free dividends for your spouse (is still available)

If your spouse has such low income, they can currently receive up to £500 tax-free in dividends. This is thanks to the ‘tax-free’ dividend allowance I mentioned at the introduction.

In this case, your spouse would pay just 8.75% on those dividends, thereafter, that fall into the basic rate band.

This approach is a lot more tax-efficient than just one person -- you, the limited company director -- receiving all the income, as receiving it all may tip you into the higher tax bands, incurring 33.75% tax on dividends.

We appreciate that not all spouses have straightforward incomes! For example, as I was asked the other day:

What if my spouse is on 60k as a PAYE employee of another company?

The questioner wanted to know if there was “tax-sense,” as they put it, in appointing such a spouse as a company shareholder.

Answer? ‘It Depends.’

In this case, if the director believed that they would be taking above £100,000 in terms of dividends and salary, then they may have cause to make their spouse a shareholder and utilise the £40,000 available, until the £100k is met.

At £100,00, beware the personal allowance clawback

Going above the £100k mark means that you start to lose your personal allowance by £1 in every £2 exceeding this £100k threshold.

Just to reiterate here, once you exceed £100,000 in earnings, you start to lose your tax-free personal allowance, which for 2025-26 is £12,570 and for 2026-27 from April 6th 2026 (tax year 2026-27) will remain the same.

What happens if we split up?

A further reiteration. As your company’s shareholder, your spouse will own part of the company, so in the unfortunate event that you and your spouse separate, you’d either want to buy back the shares or you'd continue to pay out dividends at the relevant shareholding.

For a married couple, the company of which you are both shareholders will be considered a marital asset and thus potentially subject to division anyway!

What tasks will an accountant do if you make your spouse a shareholder?

That said, a good contractor accountant will be able to guide you on key documentation to draw up if you do go down the path of making your spouse a company shareholder. The accountant will be able to update your company share structure too.

Reach out to us if you’d like these two small but significant tasks done with care and consideration for your full circumstances.

Every little helps: use the £500 dividend allowance before a potential sting of  £196.75

Making your spouse a company shareholder to take advantage of their unused, basic rate tax band is a great example of how smart planning equates to better take-home pay.

And that’s particularly refreshing in the current climate, where it can feel like the tax efficiencies of limited company directorship are on the way out.

That’s why, although a zero-rated tax-free dividend allowance would only cost a PSC director on income of £35k, £55k and £126k, about £43.75, £168.75 and £196.75 respectively, per year, it’s the principle that rankles.

Finally, beware fewer tax-planning options for husband-and-wife companies…

Remember, the dividend allowance started life at £5,000, and removing it -- should the chancellor listen to the deputy PM -- would also make the tax-efficiency options for husband-and-wife companies, including PSC directors who add their spouses as shareholders, fewer and far between. Therefore, we recommend using this tax efficiency while it’s still on the statute books because, for now at least, it pays to share.