Spouses in self-assessment ACA profile picture

In this week’s Money Matters – Ask the Experts column, Arthur Millman from Goldwyns Accountants, based in Southend, FCA, a director at the company, provides his guidance for husband and wife-owned businesses regarding tax on dividends.

Dear Goldwyns, I run a small limited company in which both my wife and I own shares and, like many small companies, we both take dividends. Thus far, my wife has not been required to file a self-assessment tax return. However, friends in similar situations have told me that they now have to file a tax return for their wives: is this true?

Arthur Millman responds -

I am afraid in the majority of cases, this is true. Even if both husband and wife are directors, frequently HMRC have only required the husband to file a self-assessment return. In the past, as long as the wife’s total income didn’t push her into higher rates of tax, there was no requirement to file a return as no liability arose because the tax credit on the dividend covered the basic rate liability.

However, from 6 April 2016, the dividend regime was ‘simplified’ and the notional tax credit removed. Furthermore, after the first £5,000 of dividends [which are taxed at 0%], the dividend tax rate applies, which taxes the dividend received at 7.5% if the dividends fall within the basic rate band, and at 32.5% if they fall in the higher rate tax band.  Therefore someone who had, say, a salary equivalent to the personal allowance but received £30,000 of dividends would have paid no income tax in 2015/16, but would have a liability of £1,875.00 in 2016/17 [£30,000 – £5,000 = £25,000 x 7.5%].

Your accountant should have spoken to you about this, not only to look at alternatives, but also to deal with the registration for self-assessment. In the  example given above, the 2016/17 liability of £1,875.00 will become payable on 31 January 2018, but note that in addition the first payment on account for 2017/18 of £937.50 will also be due at the same time. A £2,812.50 tax payment in January 2018 is a marked difference to the £nil you might be expecting.

I must stress however, that despite the changes in most cases extracting income by way of dividends is still more tax efficient than taking a higher salary in place of the dividend. To understand what is best for your particular situation, you and your wife should speak with your professional accountant as soon as possible.

This article first appeared in the Southend Echo on 12 December 2017.