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FRIDAY FEATURE: Add your children as shareholders to save tax

If you are a Doctor or Dentist that operates via their own private limited company you will probably be listed as the Director of that company and thus withdraw most of your income via dividends. It may be possible to spread these dividend payments amongst family members by adding your children as shareholders.


The views expressed in this article are specifically those of Lansdell & Rose Accountants.


 How do dividends work?

Dividends are paid to company shareholders based on the percentage of company shares that the individual owns. For example, if there are two shareholders, each person may own 50% in shares.

It makes financial sense in terms of tax to take a small salary from the limited company and the remainder via dividends. This is because dividends do not attract National Insurance Contributions whereas a salaried income does.

Dividends can only be paid from what is known as retained profits. This is the money that is left in the limited company after things like expenses, PAYE and tax liabilities (Corporation Tax and VAT) have been paid out.

How dividends are taxed

The method in which dividends are taxed was changed on 6th April 2016. Dividends are now taxed based on fixed rates. For 2017/18 these are:

Tax band2017/18 incomeTax rate
Basic£0-£33,5007.5%
Higher£33,501 - £150,00032.5%
Top£150,000+38.1%

Something called a ‘dividend allowance’ is also provided. The dividend allowance effectively means that the first £5,000 is taxed at 0%.

For example: A dentist takes a gross salary of £11,500 (personal allowance rate). The rest of their income is taken in dividends (e.g. £140,000). These dividends fall into the higher tax band (£33,501 – £150,000) but the first £5,000 are taxed at 0%. And the remainder will be taxed at 32.5%. So, £140,000 – £5,000 = £135,000 @32.5%


Adding children as shareholders

There is nothing to stop you adding your children as shareholders but there are tax implications that you need to be aware of.

Pros of adding your children as shareholders

By gifting a small percentage of your limited company shares to your children you may be able to start reducing the size of your estate for inheritance tax.

The dividend income your children will receive from the shares once they reach 18, may come in very handing for things like university tuition fees.

And, you may be able to transfer capital to your children without triggering capital gains tax.

Cons of adding children as shareholders 

If your children are aged 18 years or over they will be taxed on dividends they receive.

If your children are under 18 years old, the parents are taxed on the dividends they receive. Thus, eliminating the tax advantage.

It is important to note that you may also be required to pay Capital Gains Tax at the time the gift is made.

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Considerations

There is nothing to stop you adding your children on as shareholders. And, in some cases it may be very beneficial for tax purposes.

If you do add your children as shareholders, all the relevant paperwork must be updated to reflect this, particularly the company register.


Read other tax features by Lansdell & Rose: 

How to invest tax efficiently in a new business
Are you keeping the right records?
Should you put your practice property into a pension?


Dental & Medical Financial Services work alongside many healthcare specialists to give you access to the best advice.

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