Income Splitting - The Husband and Wife Tax

This is a HMRC legislation that is sometimes referred to as the ‘husband and wife’ tax or settlements legislation and has been around since the 1930s.

The original rules stop you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people shifting their income on another person who pays tax at a lower rate.

In companies where a husband and wife each own an equal number of shares, with one of them the main earner (the contractor) and the other earning relatively little or no income. The contractor will pay out profits in the way of dividend to their partner who is in a lower tax band, creating an overall tax saving be to achieved. This is currently a very common scenario with thousands of husband and wife companies using what has always been deemed acceptable tax planning.
 
Additions to the legislation were made, noting that if the above arrangement was deemed as ‘income splitting’, meaning the arrangement was in place solely to increase tax savings and not for any commercial reason, all achieved tax savings would be repayable back to HMRC.
 
This type of arrangement should always be discussed with your accountant or tax advisor before being setup. If you would like to discuss this with JSA why not contact us.

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