Two million married couples and civil partners are missing out on the Marriage Allowance. Because so many of us have not taken up the allowance, it’s saving HMRC a massive £1.3bn every year.
For Accounting Gem clients who are married or in a civil partnership, is this worth considering for your circumstances? By claiming it, you will, as a couple, save £230 over the year in income tax.
There is no doubt that the Marriage Allowance brings a real benefit to married couples. But, if you and your spouse or civil partner both contribute to the running of your business, is the Marriage Allowance really right for you?
An Accounting Gem looks at the options.
The Marriage Allowance and the Married Couples Allowance
Married couples and civil partnerships actually have two tax-saving schemes open to them. Which one you qualify for depends on when you and your spouse or civil partner were born.
If one of you was born before 6th April 1935, you will claim the Married Couple’s Allowance. The Married Couple’s Allowance will save you between £326 and £844.50 a year.
If both of you were born on the 6th April 1935 or later, you’ll qualify for the Marriage Allowance if:
- the lesser earning of you is being paid less than £11,500 a year, and
- the greater earning of you is receiving between £11,501 and £45,000 a year (£43,000 in Scotland).
The Marriage Allowance allow the partner who earns less to transfer 10% of their personal allowance to the partner who is bringing home more in pay. This 10% transfer increases the higher-earner’s personal allowance to £13,000 meaning a tax saving each year of £230.
Is this the right option for family businesses?
Many of Accounting Gem clients are family businesses. Husbands, wives, sons, and daughters all contribute to the success of the company.
In many cases though, there’s only one family member who owns the shares and is a director. By adding your spouse or civil partner to your shareholding register, you could see a tax saving on up to £16,500 a year worth of pay coming into your household.
Getting your spouse or civil partner on board means you can double the allowances you take advantage of
As you know, every single taxpayer in the UK has an annual tax-free allowance of £11,850. If you pay yourself up to that level, you’ll pay no income tax and £411.12 in Employees’ National Insurance.
Every company directors also receives a £2,000 annual personal dividend allowance. That means that you only start paying tax on your dividends when you’ve paid yourself £2,001 or more in a financial year in dividends.
If you and your spouse or civil partner contribute to the success of the business in different ways, you can double the allowance you bring into your household by making your significant other a shareholding director.
So that’s two lots of £11,850 personal allowance and two lots of £2,000 dividend allowance. If you structure your affairs in the correct way with the optimum salary and dividend split, you and your spouse or civil partner will be able to pay yourselves £13,850 each, totalling £27,700 without paying any personal income tax or National Insurance.
How would this work in practice?
Let’s say that your family company is making £150,000 a year. You are the only one who gets paid by the business and you’re the sole shareholder.
At the moment, your company makes £100,000 a year income. Your salary is £11,850 and Employers’ NI is £472.79. Your taxable profit is £87,677.21 on which you pay £16,658.67 in corporation tax. This leaves you with a maximum dividend payable of £71,018.54. You pay £14,306.03 in dividend tax and £411.12 in personal NI. Your total take-home pay is £68,151.40.
However, let’s say there are two of you as shareholding directors on a company making £100,000 a year income. There would be two lots of salary of £11,850 and two lots of Employers’ NI is £472.79. This leaves a taxable profit of £75,354.42 on which you pay £14,317.33 corporation tax. This leaves a total of £61,037.08 payable in dividends to both of you. The total amount of dividend tax you’d pay for the two of you would be £4,277.78 and two lots of personal NI at £411.12.
For each of you, you’ll receive £30,518.54 in dividend on which you pay £2,138.89 in dividend tax. You’ll also receive £11,850 in salary on which you’ll pay £411.12. That will leave each person with £39,818.53 each after all tax (personal and corporate) has been paid or £79,637.06.
Having two shareholders instead of one means that your household will be better off by £11,485.66 a year, significantly more than the Marriage Allowance.
The Employment Allowance
This offers a further opportunity to save money. If you are the sole director, shareholder, and employee in your family business at the moment, you can’t avail yourself of the Employment Allowance. The Employment Allowance is a scheme which allows you to take back the first £3,000 a year of payments you make towards National Insurance Employer’s Contributions.
If you’re not getting the Employment Allowance, try to use up all of your dividend income because the 19% corporation tax you have to pay on the profits.
Accounting Gem fact – a dividend is a payment from a company to its shareholders from the profit it makes.
The corporation tax you’d pay is less than the 25.8% cost you’ll pay on a salary payment on National Insurance Employer’s Contributions and National Insurance Employee’s Contributions.
You could claim Employment Allowance and both of you could pay yourself up to £11,850 each and the Employment Allowance would mean that HMRC refunds the company the two payments of £472.79 in National Insurance Employer’s Contributions for you and your spouse of civil partner.
Be careful to make sure you both work for the business and you can prove it
HMRC have noticed that more and more family companies have begun to structure themselves this way since the dividend scheme was made far less attractive in the 2015/2016 budget.
Try to keep evidence to show that you’re both engaged in the business and take a similar share of the workload.
Want to find out if this will work for you?
An Accounting Gem can talk you through all the options available to you and your family about saving tax. Please call us on.
Speak with one of our team on 01473 744 700 or email us on contactus@aag-accountants.co.uk.
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