Splitting income with your spouse
If you are married you may want to consider your spouse owning some of the shares in your company so that you can pay them some dividends. They can also potentially be made an officer of your company (director or company secretary) to enable them to be paid a low salary of £700 per month.
We’ll deal with these two points separately.

Making your spouse a shareholder
Spouses are allowed to gift shares to each other with no capital gains tax issues (there is an exemption for married couples).

In order to transfer shares to a spouse the necessary paperwork needs to be filled in which will be a ‘Stock Transfer Form’ and set of board minutes.

If there is only one share in issue then first additional shares will need to be issued (allotted) to you before you can then transfer some to your spouse. This requires some paperwork which needs filing with Companies House. You are best to engage a professional advisor to deal with this for you to ensure it is done correctly.

Once shares are transferred to your spouse then dividends can be paid in proportion to the shareholdings.

For example, if there are 100 shares in issue all owned by you and you transfer 20 of these to your spouse, then next time you pay a dividend it should be paid in the proportion 80 / 20. So for a £1,000 dividend this is £800 to you and £200 to your spouse.

Your spouse’s dividend should be paid to their personal bank account for them to do what they want with.

It is very important that the shares transferred to your spouse have full rights, not just a right to dividends. If you have ordinary shares in issue this will normally be fine but make sure the shares have full rights including rights to voting and rights to capital on winding up.

Be aware that by transferring shares to your spouse they then have some ownership of your company which they can do what they want with – we are not legal advisors so cannot comment on any potential issues that come with this, we are simply giving you some options based on tax efficiency.

If your spouse has no other personal earnings then purely from a tax efficiency angle it may make sense to gift them 50% of the shares so the dividends can be split equally but you will need to calculate the best split for your personal situation.

If your spouse does have other earnings then you’ll need to factor these in before deciding what number of shares to gift to them to ensure overall tax efficiency between the two of you.

Even if they have higher earnings, as long as they don’t have other dividend income then it may still be worth transferring some shares to them to ensure they can take advantage of the £2,000 tax free dividend allowance in 18/19.

Is income splitting risky?
Currently as long as a couple are married and all shares have full and equal rights there is no major risk of a HMRC attack on income splitting. However, in the world of tax things are constantly evolving as different tax cases come to light, so you can never say there is no risk.

Historically HMRC have tried to attack situations of income splitting where a married couple splits their income but in reality there is only one main worker in the company (which is usually the case with contractors and freelancers) – however there was a key tax case called ‘Arctic Systems’ in which HMRC tried to use something called the ‘settlements legislation’ to prevent an IT consultant from splitting his dividends with his wife.

In the Arctic Systems case the IT consultant did the vast majority of the work in the company and his wife just did a bit of admin here and there. In the first instance HMRC did win their case, however the case went higher up the system and was actually overturned by the House of Lords.

The House of Lords agreed with HMRC that a ‘settlement’ had indeed occurred, however the House of Lords also found that the exemption for married couples stood – the key factors were that:
• There was a gift from the husband to the wife, and very importantly
• The gift was not wholly or mainly a right to income

This last point stood because the shares had full rights, not just to dividends but to voting and capital distribution.

So the opinion of most tax advisors currently is:
• Gifting shares to your spouse is low risk (not zero risk) as long as the shares have full and equal rights
• Things may change in the future

What if you’re not married?
The situation is more complicated if you’re not married – generally we would not advise a limited company contractor or freelancer to gift shares to their partner as there is a heightened risk of a HMRC challenge. There are also potential capital gains tax issues.

If both partners are very involved in the business then you may be ok but this is rarely the case with a contractor or freelancer.