Company Formation

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Income shifting and paying family members

Following the introduction of Independent Taxation many years ago, much tax planning developed around ensuring that all family members' personal allowances and lower rates of tax are used to best effect.

The introduction of an otherwise non-working spouse, let's say, as a partner or shareholder would allow part of the business's profit to be allocated to that spouse. Not difficult to do and lots of money to be saved. With companies, when this ploy is combined with the fact that there is no national insurance payable on dividends, there is plenty of tax and national insurance that could be saved.

However, the government has said that it would address this 'income shifting' in April 2008 and then deferred their proposals until April 2009. Then, in the Pre-Budget Report, the Chancellor made the following announcement:

'The government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax, known as income shifting. The government has consulted on this issue but, given the current economic challenges, the government is deferring action and will not bring forward legislation at Finance Bill 2009. The government will instead keep this issue under review.'

So for now there is technically no change in the regulations. Many commentators may suggest that it is illegal to pay a spouse an income or a dividend but until the government change the rules this is simply not true.

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