Tax Benefits of a Husband-Wife Business Partnership
Author: Russell SmithJune 12, 2012
Discover how you can save money on tax through self-employed partnerships.
Before we go further, know that you don’t have to be a husband and wife to benefit from this tax saving technique. You just have to be living under the same roof.
At Russell Smith Chartered Accountants, we think in pound signs. Experts in accounting, we are always on the lookout for ways to save our customers money. It doesn’t matter whether it’s through staying up-to-date with new laws, tax changes, or any other money-saving business strategy, we’re always searching for a better way of doing things.
Some money saving strategies are not so complex, and one particularly effective technique can easily be carried out by any business owner operating a limited company.
The Commonly Overlooked Problem
It’s common practice for the business owner of the household to be the sole earner. Let’s say, for example, they earned £80,000 a year, while their partner earns nothing — taking care of the home life instead. From a personal standpoint, this can work as it allows money to roll in while the home and family stay well looked after. However, from a financial standpoint, it’s not the best way of doing things.
While having a £80,000 income will put you in a strong position for making pension plans or investments, it is not an advisable way of operating.
Everyone in the UK gets a personal tax allowance — currently £11,000 — yet by having only one member of the household as the sole earner, you aren’t utilising this money saving, government run, system. Although the income is being split among the household, your family home is being penalised for the disparity of income levels between the homemaker and the business owner.
For those in traditional employment, there is little to be done about this. However, for those dealing with their own tax as a self-employed individual, you can save thousands.
What Can I Do to Save on Household Income Tax?
There is a very simple way of saving a huge portion of your household income every year: dividends.
One member of the household earning £80,000 through their limited company simply isn’t necessary, and through utilising dividends, you can split that income down the middle, both taking home £40,000 each. In this scenario, not only would you double the amount of tax-free income you receive, but you would also totally remove, or at least minimise, the requirement to pay the 20% “higher rate” rate of tax.
Taking advantage of this system easy, and can be done by anyone running a limited company. You don’t have to be a director or employee to gain a salary from a business, you just need to be a shareholder. To make these huge savings, you and your spouse/partner must enter the business as 50/50 shareholders. This allows you both to take equal dividends out of the company.
How to Save on Tax Through Self Employed Partnerships
The system of saving on your tax as a self employed worker is a little more complicated than simply splitting shares 50/50 and taking dividends to reflect this. Though, it also isn’t so complicated that you might consider it more hassle than it’s worth.
By splitting income through a mixture of dividends and salary — to capitalise on your £11,000 tax-free allowance — you can drastically reduce the amount of taxable income your household earns.
So, why don’t all business owners capitalise on this tax saving technique and share their business with their partner? This I can’t answer. The only reason to avoid such an effective method of saving thousands in tax would be for personal reasons. Perhaps you want to keep your personal and business life separate? For me though, getting your partner involved as a shareholder is a fantastic money saving tool.