Would you have your husband as a company director?

[messybessie]

I'm just about to become a Limited Company. I've been freelancing for the past 2 years as a sole trader.

My accountant says that DH could be listed as a company director, and given shares, but I still don't quite understand the pros and cons of doing this.

I know there are some tax advantages to receiving dividend payments but I still don't understand what they are!

Change accountants? If you dont understand what s/he is telling you and you are uncomfortable asking for clarification, then they are not the right accountant for you.

He hasn't really sat down with me yet, we've only had a brief discussion over the phone. I have a meeting with him next week to go through it all.

i was just wondering whether there were pros or (mainly) cons that an accountant might not consider.

If he is suggesting your husband is a company director, what is your accountant suggesting you will be?

Sorry, I don't think I've phrased it right.

I would be company director. DH would also be a director and shareholder.

How sexist. If your husband is nothing to do with the business there is no need to make him a director.

Well, it will in broad terms mean you can both take dividends, which has a lower tax rate than if you take a salary. If you pay yourself a basic salary, plus NI contributions, you can stay in a low tax band with your salary, and top up your salary with company dividends. However, how much dividends you can take will depend on your company profits.

But I am sure somebody will come and give a deeper and more meaningful explanation.

The main advantage of dividends is that they are only subject to tax, unlike wages which are subject to tax and NI (both employers and employees).

A limited company must have more than one shareholder so it is usual to give some shares to the spouse (assuming all is well with the marriage). It can also be a nifty way of converting your earnings into his'n'hers earnings - the classic is if one spouse is earning at higher-rate tax and the other not-at-all then you spread the income between the two to end up with two base-rate-tax dividend receivers. However, HMRC are wise to this so it has to be done carefully and within the rules.

I don't see why he has to be a Director. A private company needs only one.

All in all, it can get very convoluted (that's why you pay the accountant lots of money!) and you can't do the subject justice in a couple of paragraphs. Speak to the accountant again and don't leave until you are happy with the reasons given.

But it also means that your husband has some ownership of the company, and I would only do this if you have a good and stable relationship, ie not plan on splitting up in the near future.

Hmmm, a limited company does not need more than one shareholder and you shouldn't need to pay an accountant lots of money to set this up right.

It is true that you can't do the subject justice in a couple of paragraphs, but briefly it might be a good idea to pay some of the profits of the company to your husband as dividends. In order to do this he must be a shareholder. Now in the past HMRC have tried to challenge these arrangements and so it has been common practice to also give the spouse a formal role in the company (such as a director). However in a landmark case (known as "Arctic Systems") the Court of Appeal, and then the House of Lords told HMRC to back off. So there is now less of a need to make such arrangements.

That's just a bit of background really - as others have said, you need to be happy with the arrangements your accountant is making and how he is explaining them to you. From the limited details you have provided I would want to be particularly clear about the implicaitons of IR35 (personally I would always subcontract this part of the work to an IR35 specialist), and always check your accountants PII and membership of an appropriate professional body.

Tuggy - I cant see how this is sexist if it makes tax savings it is just common sense I have recently done the same thing and become a director/shareholder in my dh company to save tax. Accountants dont think along the lines of keeping the little lady at home they think of how to best save their clients tax without breaking laws.

OK, the OP didn't mention anywhere it would save tax, just that it 'could be done'

I am Company secretary and minority shareholder in DH's company.
That way we split the dividends to make best use of both our basic rate tax bands.
The kids will become shareholders as soon as they are old enough.

If what OP's accountant has suggested was NOT a good idea, why do you think HMRC are in such a pickle over IR35?!?

NB: IR35 ONLY applies where there is a dominant customer. DH is well in the clear because he has over 100 seperate customers in any year.

it is also a good idea to be a director as well as a shareholder (rather than just a shareholder to benefit from the dividend situation) because of Entrepreneurs relief on CGT when/if you come to sell.

Very good point CS. I need a tax planning update

Someone has already mentioned the benefit of being a director/shareholder if later selling business and the CGT implications.

Do explain your customer base to your accountant and ask whether IR35 needs considering.

You should perhaps consider setting up the company with more than one class of share so that you can vote differing dividend levels to you and dh.

"Arctic systems" might have been kicked into the long grass for now but HMRC still have unfinished business in that direction.

HMRC seek to/can challenge arrangements set up purely for tax reasons so consider the relative size of the roles played by you and dh in the running of the company. Ask your accountant(s) for best advice to make sure your arrangement is not derisably transparent to HMRC.

As an aside you will be an employee of your limited company so if you use approved childcare you can set up a childcare voucher scheme to shelter some of your income from tax, although you may not need to do this to reduce your personal tax bill to zero depending on the level of income drawn from the company.

The cost of preparing company accounts is higher than for a self-employed set of accounts so ask your accountant to set out the tax+NI savings of operating a limited company at the level of profits that you have been generating over the past couple of years so that you can see the net saving after higher fees are taken into account.