Every UK-resident individual can receive up to £5,000 of dividends tax free each year, whatever their marginal rate of tax. As
a company owner you could arrange for your family members to receive dividends from your company to take advantage of this.
Spreading dividend income in this way can reduce the tax you pay, if that income doesn’t pass through your hands first. Dividends can also be used to help support your children through university.
The first step is to ensure your family members hold shares in your company which entitle them to receive dividends. You can give those individuals some of your own shares if you already hold sufficient shares yourself. We can help your
company issue more shares and different classes of shares as necessary.
To avoid the dividends paid on shares you give away being taxed as part of your own income, the shares should carry full rights to receive part of the company’s capital on a winding-up, as well as rights to receive variable rates of dividends. You should only make gifts of shares to your children once they have reached the age of 18.
If your family members also work for the company there is a risk that the value of the shares they receive will be taxed as part of their employment income. However, there is a general exemption for gifts made within a family relationship, so make that clear in any documents relating to the gift. Alternatively, the family members could subscribe directly for new shares in the company.
If you give shares to your spouse or civil partner (while you live together), the gift is not taxed. Gifts of shares to other individuals will be taxable, but when the value of the gift is small it may be covered by your annual capital gains tax exemption (£11,100). Tax on larger values of shares can be postponed if the company is mainly a trading company (as opposed to an investment company).
Before any dividend is declared or paid, it’s wise to review the effect it will have on the recipients. Where the dividend tips an individual’s total income over £50,000 or £100,000, they could lose child benefit or personal allowances.