Would you benefit from spreading your income across your family?04/03/2022
If you’re the major breadwinner in your family, and find yourself in a higher tax bracket because of it, then you will probably already know that you cannot spread the impact of taxation across your family.
To understand this better, imagine that two families live side by side. Family A makes £100,000 a year – all from the father’s salary. The mother volunteers for a charity and the children are both in school, so no one else in the household is earning.
Family B also makes £100,000 a year. Mum brings in £45,000, dad brings in £45,000, and the kids (who both have part-time jobs and work holidays) bring in £10,000 between them.
On paper, these two families are equally wealthy. But in reality, family A are taxed much more than family B, because all their income comes under the father’s higher tax bracket. Family B, meanwhile, only pays tax on the £90,000 that the parents earn – and what’s more, the tax is lower (as each parent’s wage of £45,000 would be taxed at a lower rate than Family A’s father’s £100,000).
If your family looks more like family A than family B, you probably aren’t thrilled about it. Here are three ways to rectify the situation…
Life partner to business partner
If you’re a sole trader, consider converting your business into a partnership with your spouse then divide the profit between you. Instead of one partner drawing £100,000 a year, it now becomes two partners drawing £50,000 each. If you plan to do this, you should have a commercial reason for the change, and you should ensure that the savings you make will not be offset by the additional costs converting to a partnership incurs.
Sharing out your limited company
If you have an existing limited company, then your partner can take shares or a directorship in the company. However, you will need to take care to organise the issue or transfer of shares to ensure you don’t trigger the “settlement legislation”. Settled property would be taxed as though the transfer had not taken place, wiping out any potential savings.
Add “and son” to the business
You can always diversify the family’s income by employing a family member. Just make sure there is a clear commercial case for the role, and that your family member is treated the same as your other employees (and that their wages are in-line with the usual rate of pay for the work they’re undertaking). Of course, it goes without saying that this means observing all the standard employer obligations (i.e.: making pension contributions, ensuring National Living Wage and National Minimum Wage levels are observed, etc.).
If you want to learn more about spreading your income amongst your family members to avoid paying more tax than you need to, give JW Hinks a call on 0121 456 0190. Our friendly and professional tax team can ensure you save the maximum amount possible without falling foul of HMRC.