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Hi, I’m Paul, founder of Paul Marks & Co Chartered Accountants.

One question we’re asked regularly is:

“Can I pay my husband, wife or partner through my limited company?”

For many owner-managed businesses, the answer is yes. If one spouse pays tax at a higher rate and the other has little or no income, it can often make sense to spread income between the two of you. Doing so can reduce the family’s overall tax liability in a perfectly legitimate way.

However, there are important rules that need to be considered.

HMRC has legislation known as the settlements legislation, which is designed to prevent what is commonly referred to as income shifting. In simple terms, income shifting occurs where someone who has generated the profits attempts to divert that income to another person, usually someone paying tax at a lower rate, purely to obtain a tax advantage.

HMRC has challenged a number of arrangements over the years where they believed that profits had been diverted artificially rather than shared as part of a genuine commercial arrangement.

One of the most important cases in this area is the Arctic Systems case.

In that case, Mr Jones carried out most of the fee-earning work in the business, while his wife owned ordinary shares and received dividends. HMRC argued that the dividends paid to Mrs Jones should instead be taxed on Mr Jones because, in their view, he had effectively diverted his income to his wife.

The case eventually reached the House of Lords, where HMRC lost.

The court accepted that although there had technically been a “settlement”, the legislation contained an important exemption for outright gifts between spouses. Because Mrs Jones owned ordinary shares carrying the same rights as her husband’s shares, and those shares represented genuine ownership in the company, the dividends belonged to her and were taxable on her rather than on her husband.

This decision gave many family companies greater certainty, but it did not mean that every arrangement between spouses will automatically be accepted.

Each case depends on its own facts.

For example, factors that are generally helpful include:

• Both spouses owning genuine ordinary shares with equal rights.
• The spouse having a real interest in the business and, ideally, carrying out some work for the company.
• The company having been structured correctly from the outset.

On the other hand, arrangements involving different classes of shares—often referred to as alphabet shares—or complex dividend arrangements may require much more careful consideration. Depending on how they are implemented, they can increase the likelihood of HMRC scrutiny and should never be used simply to divert income without taking professional advice.

Unfortunately, we regularly meet new clients whose companies have been established incorrectly. What appeared to be simple tax planning can sometimes create unnecessary risk because the share structure was never properly considered.

The good news is that legitimate tax planning remains entirely acceptable. The key is ensuring that any remuneration or dividend strategy reflects genuine ownership, commercial reality and complies with the tax legislation.

If you’re thinking about introducing your spouse into the business, changing your share structure or reviewing how profits are extracted, it’s always worth taking advice before making any changes.