Q:I’m a sole trader and currently paying 40% tax. My husband helps out with the business, but he’s a lower-rate taxpayer. We’re looking at ways we can reduce our overall tax bill. Can you give us any recommendations?
A: It’s certainly worth exploring what could be relevant here in terms of effective tax planning strategies.
Firstly, it would be beneficial to make your husband a partner. If your spouse or civil partner becomes a partner in your business, you can allocate some of the profits to them, potentially reducing the overall tax burden by using their lower tax rate. However, you must bear in mind that this should be a genuine business arrangement, and his share of profits should reflect his involvement in the business.
For anyone else reading this with similar questions, but operating a limited company rather than being a sole trader, it‘s perhaps worth mentioning that if your spouse is a lower-rate taxpayer, you could gift them shares. This could allow dividend income to be taxed at their lower rate. However, it‘s worth noting that HMRC may scrutinise this arrangement under the “settlements legislation” if the shares were given purely to divert income and avoid tax.
We should also consider that from April 2025, new rules will affect income allocation between spouses for jointly held property. While this doesn‘t directly impact business income, it highlights HMRC‘s ongoing focus on income splitting.
It‘s certainly worth delving into the details of your business and tax arrangements in greater depth with a professional before diving into making any changes. Please give our team a call if you‘d like to discuss this.
