You recently started a new business which you run through a company. You’ve been told that you can reduce your tax and NI bill if you issue your spouse with shares in the company. Assuming that’s correct, what are the practicalities involved?
Tax and NI savings
Sharing business profits between spouses or civil partners is a tried and trusted method of minimising tax when income is taken, but it’s not guaranteed in all circumstances. For example, splitting income would have the opposite effect if the spouse or civil partner with whom the income is shared has other income that places them in a higher tax bracket than the first spouse or partner.
Tip. Where the business operates through a company, using so-called alphabet shares allows couples to allocate income between themselves flexibly to accommodate their respective financial circumstances. The same strategy can also work for unmarried couples, but there are complications that we’ll explore in a separate article.
What’s the ABC of shares?
Alphabet shares are typically “ordinary shares” that have identical rights but have a different designation. For example, ordinary A shares, ordinary B shares, and so on. This means the company can declare a dividend at one rate for A shares and at another rate for B shares. It may do this, for example, if one shareholder in a company has more income than the other, e.g. a salary from another job. The first shareholder can be paid a lower dividend to keep their income within the income tax basic rate band.
Creating alphabet shares
To avoid trouble, especially with HMRC, it’s important to get the procedure for issuing new shares right. The following steps should be taken.
Articles. If your company was formed before the Companies Act 2006(CA 2006) , you’ll probably need to amend its articles of association to allow it to issue new classes of share. This requires two shareholder resolutions: one to authorise the amendment of the articles and the other to issue the new shares. If your company was formed using standard CA 2006 articles, they include the right to issue new shares but you should check and amend them if necessary.
Companies House. The resolutions we’ve already mentioned must be sent to CH within 15 days, plus you must also complete and submit a Form SH01 within 30 days of issuing the new shares.
Dividends. Because HMRC takes an unfriendly approach to alphabet shares, it’s important to have the correct paperwork when declaring a dividend. This will be either a directors’ resolution for an interim dividend or a shareholders’ resolution for a final dividend.
Tax reporting. The issue of shares doesn’t trigger any immediate tax liabilities (not even stamp duty). However, in most cases it must be reported to HMRC as an employment related securities (ERS) transaction by the 5 July following the end of the tax year in which the shares were issued.
Tip. You can issue of alphabet shares yourself but unless you’re comfortable with the process we recommend using a company formation service (find one easily by searching online). On average they’ll charge around £350 plus VAT.
Issuing shares to your spouse can reduce the tax bill on dividends by issuing different classes of share to each shareholder so allowing dividends to be paid at different rates to each. Ensure the correct shareholder resolutions are passed and notified to Companies House along with Form SH01. You must usually notify HMRC after the end of the tax year.
The next step
HMRC’s guidance on ERS reporting
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.