Can you pay dividends to your spouse? - CloudCo Accountants

Can you pay dividends to your spouse?

Company director looking to pay dividends to their spouse

As a small company owner, you must have considered sharing your dividends with your spouse. This is a common strategy among small business owners, but they must check the ins and outs of tax law before proceeding.

This practice, often called dividend splitting, can offer significant tax benefits. However, it’s important to consider you’re making the most informed decision for your business. Dividend payments can offer great tax advantages but come with many legal and financial considerations.

Dividends can only be paid to shareholders of a business, so to pay dividends to your spouse, they must be made a shareholder of a limited company.

This detailed article explains whether you can pay dividends to your spouse, what you should consider, and how to ensure tax compliance while paying dividends to your partner. Let’s get into the facts so you may make informed tax-saving decisions and potentially improve your family’s financial status.

We make dealing with your tax affairs a simple and stress-free process, aiming to save you money wherever possible. Get in touch with us today.

Do dividends have to be shared equally?

No, dividends are not required to be distributed equally among shareholders. Dividends are distributed in accordance with the company’s articles of association and the proportion of shares held by each shareholder. This means that if your spouse owns stock in your company, they can earn dividends paid according to their stake.

In other words, you can say that the person who owns more shares will receive a higher rate of tax on income than the other person with fewer shares. There are some exceptions to this rule, though. Sometimes, a company issues different kinds of shares with varying dividend rights. In this case, some share classes may receive dividends on priority over different voting rights elsewhere.

Does dividend income affect marriage allowance?

Yes, dividend income can indeed affect the marriage allowance. The marriage allowance lets you transfer some part of your unused personal to your spouse if they earn less than a specific amount.
Dividend income is also sometimes considered taxable and can increase your spouse’s total revenue. If this increases your spouse’s salary above the level for the Marriage Allowance benefit, they may no longer be eligible.

Even if they remain qualified, the additional income from the dividends received may lower their tax benefit from the Marriage Allowance.

Can I pay dividends into a joint account?

You can pay dividends into a joint account with your spouse. However, for tax purposes, it is important to monitor the ownership of dividend income. Dividends should be reported as income for the main shareholder (your spouse), who legally owns the shares and other income, regardless of the joint account.

What to consider before paying dividends to your spouse

To get dividends, your spouse must be a shareholder in a limited company. This entails transferring shares to them, which may result in legal and financial consequences. Ensure that the transfer is in accordance with your limited company’s main shareholder’s articles of association and shareholder agreements.

Here are several key factors you should consider before paying dividends to your wife:

Shareholder Status: Make sure that your spouse is a registered shareholder of the company. Then, only dividends can be paid to shareholders.

Tax Implications: Dividend income for married couples is subjected to tax considerations, and the tax rates depend on your spouse’s total income. So, before paying dividends, you must consult a tax advisor.

Marriage Allowance: You must consider how dividend income can impact your spouse’s tax eligibility for tax benefits.

Accurate Documentation: You must maintain accurate records of dividend declarations and payments to help you with legal compliance.

Income tax

Dividends are taxed differently just income and than other types of income. Dividend tax rates vary according to your income tax bracket.

  • The basic rate is 8.75%.
  • The higher rate is 33.75%.
  • The additional rate is 39.35%.

The Dividend Allowance ensures that the first £1,000 of dividend income is tax-free. Dividends paid to your spouse are added to their overall income and taxed accordingly.

HMRC scrutiny

HM Revenue and Customs (HMRC) rigorously supervise dividend payments, particularly in family-owned enterprises. They may scrutinise arrangements that appear to be primarily intended to evade taxes. The settlements legislation may apply if HMRC feels the primary motivation for transferring shares to your spouse is to decrease your tax obligation.

It is always advisable to consult a tax advisor or an accountant like Cloudco Group to lighten the complexity of providing dividends to your spouse.

Settlements legislation and HMRC Scrutiny

The HMRC settlements legislation may scrutinise agreements in which shares are transferred to a spouse primarily to save tax. This means that dividend payments to your spouse should be part of a legitimate business arrangement rather than just moving revenue to avoid higher tax rates.

How to pay dividends to your spouse

Here are ways you can pay dividends to your spouse:

  • Transfer a portion of your shares to your spouse in accordance with your company’s governing documents.
  • Follow the formal process for declaring dividends, ensuring your spouse’s shareholding is accounted for.
  • Pay the declared dividends, which can be transferred to a joint account if desired.
  • Both you and your spouse must record dividend income on your tax returns.

Dividend Waivers and Split Dividends

When discussing dividend payments, some may contemplate dividend waivers, in which one shareholder waives their right to dividends, allowing more to be given to other shareholders. However, HMRC strictly monitors such actions. Dividends and splitting dividends between spouses can be tax efficient if done appropriately and in accordance with all applicable laws and tax norms.

Need tax advice? Contact Cloudco Group

Cloudco Group can offer personalised tax advice and support with dividend distributions. Our team of tax specialists can help you navigate the process and optimise your tax condition while adhering to all legal obligations. For more details regarding dividend payments, get in touch with us.

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CloudCo Group is a Chartered Management Accountancy Firm offering premium accounting services to a range of businesses and individuals.

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