MONTHLY FOCUS: USING YOUR COMPANY TO DIVERT INCOME TO FAMILY MEMBERS
MONTHLY FOCUS: USING YOUR COMPANY TO DIVERT INCOME TO FAMILY MEMBERS Operating a business through a limited company is less tax-efficient than it used to be. However, it can still be a very useful way of diverting income to other family members. In this Monthly Focus, we look at the methods, and associated considerations, involved in doing this. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo. EMPLOYING YOUR FAMILY As a general rule, you can save income tax if income can be diverted from you to other members of your family to make use of their annual personal allowances and benefit from their lower marginal rates of tax. Warning! If you employ family members, their salaries will tend to come under scrutiny during the course of an enquiry by HMRC into your company’s accounts. HMRC will be looking to see whether the salaries exceed a commercial rate for the work performed. Where the amount paid clearly exceeds the commercial rate, HMRC will seek to disallow the excess on the grounds that it has not been incurred wholly and exclusively for the purposes of the company’s trade. An identical rule applies to unincorporated businesses. The “wholly and exclusively” point was considered in the First-tier Tribunal (FTT) case of McAdam v HMRC 2017 where a plumber claimed a deduction for £90 per week to his wife for writing up his books, taking phone calls, processing orders, etc. HMRC accepted that the taxpayer’s wife had done some work, but calculated that an appropriate wage would be £1,344 per annum (about £26 per week), at an hourly rate of £8. The FTT agreed with HMRC and refused the deduction. It said the payment was excessive compared to the going rate for the type of work, plus the plumber’s business records were poor and there was nothing really to show how much work his spouse did or that she was employed at all. To avoid this trap, make it clear what the family member is doing. To help, use a Family Member’s Job Description to set out the duties they will carry out. Just using the job description doesn’t guarantee that you can deduct any salary payments. You will also need to keep records to demonstrate the work done by your family member. This could be achieved by getting them to complete a timesheet if an hourly rate is being paid. Ensure the amounts paid are equivalent to what you would have to pay for a third party to perform the same duties. For example, don’t be tempted to pay your son £15,000 for cleaning the windows once a month. If you are employing someone, then you should ensure that you are at least paying the national minimum wage or national living wage rates, depending on their age. If HMRC challenges the remuneration for a family member, try to get it to agree an “allowable” amount so that you don’t lose the entire tax deduction. Provided the “excess” element is formally waived and paid back to the company, HMRC will generally restrict the income tax charge to the tax allowable part of the remuneration. When is it beneficial to employ your spouse? Each spouse (or unmarried partner) has their own personal allowance and personal basic rate tax bands. So it’s generally beneficial to pay them a salary if the following conditions are met: the salary will be taxable at a lower rate of tax than it would be if it was paid to you the income tax saving is not less than the additional NI liability your company is able to obtain a tax deduction for the salary, i.e. it is not excessive. Note. Civil partners have the same legal status as spouses for tax purposes. References to “spouse” should be read as “spouse or civil partner”. You should actually pay the salary amounts to your spouse rather than the salary being merely an accounting entry. When paying them, it’s preferable to pay the salary into a bank account in your spouse’s sole name rather than a joint account. In Moshi v Kelly 1952, tax relief for a wife’s wages was denied as they were charged to the owner’s own drawings account. Any amounts paid to your spouse must not be lower than the national living wage (NLW). Therefore, the amount you can pay your spouse (providing they are 21 or over) must not be less than £12.71 per hour for the 2026/27 tax year. If you make your spouse a director, then the NLW may not apply providing they don’t have an employment contract and are effectively receiving a salary for their role as an office holder. What’s the optimal salary to pay your spouse? You need to weigh up the income tax savings against the additional NI costs. For 2026/27, your spouse can earn up to £242 per week without paying any employees’ NI. Above this level they’ll pay 8% employees’ NI on earnings between £242 and £967 per week (£12,570 to £50,270 on an annual basis for 2026/27) and 2% on earnings above £967 per week. For 2026/27, the company will pay 15% employers’ NI on earnings over £97 per week (£5,000 on an annual basis) – although, depending on the number of other employees the company has, it may be possible to offset the employers’ NI cost using the £10,500 NI employment allowance. Assuming your spouse has no other income, for the 2026/27 tax year you can pay them a salary of £1,048 a month (£12,570 a year) without them incurring any income tax or NI liability. If the employment allowance has been fully utilised by the company’s other employees, the company will need to pay employers’ NI of £1,136 (15% of (£12,570 – £5,000)) but this cost will be more than offset by the 25% (or 19% if taxable profits are below £50,000) corporation tax saving. Just make sure that the amount paid is commercially justifiable for the actual
Free childcare for company owners?
Free childcare for company owners? You’re an owner manager and your daughter is due to start nursery. You understand that working parents can get free childcare but a friend said this isn’t available if you only pay yourself dividends. Is this true and what can you do to qualify? Get more Accounting Services from Dunhams. Earnings Much is made of the cliff-edge thresholds in the tax system, particularly for parents. For example, if one parent earns over £60,000 your child benefit is clawed back, and if one parent earns over £100,000 you’re not eligible for any childcare support. But what happens at the other end of the spectrum? In some cases, you need to earn more, not less, to qualify for state benefits. Working parents In England, working parents of children aged nine months to four years can get 30 hours of free childcare per week under the Free Childcare for Working Parents scheme. There are different schemes for Scotland, Wales and Northern Ireland. Minimum earnings To qualify for the scheme, you need to earn the equivalent of 16 hours per week at minimum wage. That’s £195.36 per week or £10,159 per year if you’re over 21. Only income from employment or self-employment counts towards the threshold. It doesn’t include dividends, interest or rental income. You must take a salary of at least £10,159 per year to qualify for free childcare. Assuming you’re the only director/employee, your company will pay Class 1 NI as the secondary threshold is only £5,000. This amounts to £773.85 ((£10,159-£5,000) x 15%) which is a small price to pay for 30 hours of childcare per week. The net cost is actually lower because the company will get corporation tax (CT) relief. Couples Don’t forget that if you’re living together, whether you’re married or not, both you and your partner need to be working in order to qualify. Tip. If your partner doesn’t meet the requirements, either because they aren’t working or don’t receive certain benefits, e.g. carer’s allowance, your company can employ them. You’ll need to pay them at least £10,159 per year to qualify for free childcare. Trap. To get the tax benefits of paying them a salary, e.g. a CT deduction, they must have a genuine role in the company. If it isn’t appropriate to involve them in the trade, you can give them administrative tasks, such as chasing unpaid invoices, preparing your books, etc. NI break bonus If you’re the sole director/employee, by hiring your partner your company will become eligible for the employment allowance. This reduces the company’s NI bill by up to £10,500. Therefore, by hiring your partner your company will pay less NI. Example. Andy is a consultant operating via a limited company. He is the sole director/employee. He pays himself a salary equal to the personal allowance of £12,570. The company isn’t entitled to the employment allowance and so has an NI liability of £1,135.50 ((£12,570-£5,000) x 15%). Andy hires his spouse, Agnes, as a part-time secretary, paying her a salary of £12,570. The company now has two employees and is entitled to the employment allowance. No NI is payable, saving £1,135.50. back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Get in Touch Want a financial consultation with no obligation? Call Dunhams Chartered Accountants now on 0161 872 8671 Or email paul.o’brien@dunhams.co.uk or andrew.edwards@dunhams.co.uk
HMRC reminds employers to check tax codes at start of new tax year
HMRC reminds employers to check tax codes at start of new tax year HMRC is reminding employers to review PAYE coding notices as the 2026/27 tax year gets underway. With new tax codes now in operation, what should you be looking out for? To find more Help with Your Payroll, take a look at our Services. In its latest Employer Bulletin, HMRC highlights the importance of checking coding notices (P6 and P9) when they are received. These codes determine how much tax is deducted from employees and errors can lead to under- or overpayments. Although new codes apply from the start of the tax year, HMRC notes that those issued earlier may not include all adjustments. Further updates can follow once additional information is processed, meaning employees’ tax positions may change during the year. Employers must apply coding notices promptly through payroll and ensure systems are updated for the new tax year. Failure to do so can result in incorrect deductions and additional work to correct errors later. The practical message is to treat coding notices as an active compliance step rather than a routine update. Unexpected changes should be reviewed and, where necessary, queried with HMRC or the employee to avoid ongoing issues. back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Get in Touch Want a financial consultation with no obligation? Call Dunhams Chartered Accountants now on 0161 872 8671 Or email paul.o’brien@dunhams.co.uk or andrew.edwards@dunhams.co.uk
Don’t overlook the partial exemption annual adjustment
Don’t overlook the partial exemption annual adjustment As VAT year ends approach for many businesses, HMRC’s guidance highlights the need to carry out the partial exemption annual adjustment. This is often overlooked but can have a direct impact on recoverable VAT. What do you need to check? To find more Accounting Services here If your business is partially exempt, you will recover input VAT provisionally throughout the year using an agreed method. At the end of your VAT year, you must perform an annual adjustment to calculate the correct amount of input VAT recoverable for the full year. The adjustment compares the provisional recovery made during the year with the actual recovery based on total taxable and exempt supplies. Any difference must be included on the VAT return covering the final period of the VAT year. In addition, you should consider whether the standard method override applies. If the standard method does not give a fair and reasonable result, you are required to use an alternative calculation. HMRC expects businesses to review this position each year. The takeaway is straightforward. If you are partially exempt, ensure the annual adjustment is calculated accurately and on time. Errors can lead to under- or over-recovery of VAT and may trigger HMRC queries if not corrected. back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Get in Touch Want a financial consultation with no obligation? Call Dunhams Chartered Accountants now on 0161 872 8671 Or email paul.o’brien@dunhams.co.uk or andrew.edwards@dunhams.co.uk
HMRC publishes penalty guidance for MTD IT
HMRC publishes penalty guidance for MTD IT HMRC has published guidance on how penalties will apply under Making Tax Digital for Income Tax (MTD IT). With mandation approaching from April 2026, what do you need to know about the new regime? Get the Personal Tax Services You Need The new system replaces existing penalties with a points-based regime for late submissions, alongside separate penalties for late payment of tax. Under the points-based system, you receive a point each time a submission deadline is missed. Once a threshold is reached, a fixed penalty is charged. For quarterly MTD submissions, the threshold will be four points, after which a £200 penalty applies. Further missed deadlines will trigger additional £200 penalties until compliance improves and points are reset. Points expire after a period of good compliance. Late payment penalties operate separately. These are based on how long the tax remains unpaid, with penalties arising at 15 and 30 days, and again after six months. Late payment interest continues to apply. The new penalty regime will apply from 6 April 2026 for those within MTD IT. However, HMRC will operate a soft-landing period for late submission penalties in the first year of mandation. In practice, this means that penalty points will not be charged for missed quarterly updates during that initial period, giving taxpayers time to adjust to the new reporting requirements. As mandation approaches, you should ensure systems and processes are in place to meet quarterly deadlines. While late submission penalties are deferred initially, late payment penalties and interest will still apply where tax is not paid on time. back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Get in Touch Want a financial consultation with no obligation? Call Dunhams Chartered Accountants now on 0161 872 8671 Or email paul.o’brien@dunhams.co.uk or andrew.edwards@dunhams.co.uk
Directors to face identity checks under Companies House reforms
Directors to face identity checks under Companies House reforms Companies House has published further guidance on the introduction of mandatory identity verification for company directors and other individuals involved in company filings. The change forms part of the reforms introduced by the Economic Crime and Corporate Transparency Act 2023. What do you need to know? Get the Help You Need with Accounts Filing Under the new regime, company directors, people with significant control and individuals who file documents at Companies House will be required to verify their identity. The aim is to improve the accuracy of the Companies House register and prevent misuse of company structures for fraud and other economic crime. Identity verification will be possible in two ways. You will be able to complete the process directly through Companies House using its digital verification system, or you can verify your identity through an authorised corporate service provider, such as an accountant or company formation agent. The verification requirement will be introduced in stages. Once the system is fully implemented, new directors will need to complete identity verification before their appointment can be registered. Existing directors will be given a transition period to comply with the new rules. For business owners, the practical impact is that company filings will increasingly be tied to verified identities. Directors who fail to complete the process may find they are unable to make filings or act for the company through the Companies House system. You should therefore monitor Companies House guidance and announcements and ensure directors are prepared for the new verification requirements. back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Get in Touch Want a financial consultation with no obligation? Call Dunhams Chartered Accountants now on 0161 872 8671 Or email paul.o’brien@dunhams.co.uk or andrew.edwards@dunhams.co.uk
Are buy-to-let companies worth the hype ?
Are buy-to-let companies worth the hype ? There’s no doubt that landlords have been on the receiving end of multiple tax hikes in recent years. So called “property experts” will tell you that the best tax-saving strategy is to operate through a company. Are they right? Get more Company Accounting Services Trending According to the press the number of landlords setting up buy-to-let companies has hit a ten-year high. Over 66,000 companies were set up in 2025, thought to be in response to increasing mortgage rates and frozen tax thresholds. What Companies House statistics can’t tell you is whether all those landlords will save tax, and if so, why. Tax on profits If you look solely at the rate of tax applied to profits, corporation tax is usually cheaper. However, that isn’t the full picture. Once you draw the income from the company, you’ll be hit with personal tax and so any advantage is more than wiped out. You’ll actually be worse off. Basic rate and non-taxpayers will be better off owning the properties personally. If you need to spend the rental income, company ownership probably isn’t for you as, overall, more tax will be payable. Mortgage maths A key difference between corporate and personal ownership is the tax treatment of mortgage interest. It’s fully tax deductible for a company but individuals are only allowed a tax credit, equal to the basic rate of tax (currently 20%). Example. A property business generates profits of £50,000, before taking into account mortgage interest of £9,000 in 2025/26. A company would pay £7,790 in corporation tax ((50,000-9,000) x 19%), leaving £33,210 to be extracted. Assuming the shareholder extracts this as a dividend, and is a higher rate taxpayer, they will be left with £22,002 after tax (£33,210 – 33.75%). Whereas an individual would pay £18,200 income tax ((£50,000 x 40%) + (£9,000 x 20%)), leaving net income of £31,800. This represents a saving of £9,798, despite the mortgage interest restriction. Before deciding whether to set up a company we would recommend running calculations based on your individual circumstances. When is it better to use a company? A company can be more tax efficient if you don’t need to extract the income and instead use it as a piggy bank. Example. Andy and Agnes are higher rate taxpayers. They set up a company which purchases buy-to-lets. Net profits are around £20,000 per year and as such the company pays corporation tax of £3,800. Whereas if this was personal income they would pay £8,000 in income tax. If they retire in ten years, the company would have an additional £42,000 ((£8,000-£3,800) x 10) on top of the retained profits. Tax relief for any mortgage interest increases the savings further. When they retire they are no longer higher rate taxpayers and can take dividends as required and pay just 10.75% (2026/27 rates) tax. Double tax on growth Longer term plans for the properties also need to be considered. If you plan to sell them once they’ve appreciated in value, you’ll pay capital gains tax rates (18/24%) on the difference, whereas a company will pay corporation tax rates (19-25%). Again, the problem is the additional personal tax you’ll incur when you take money out of the company. If, instead of selling up, you plan to pass them on to the next generation, using a company can better facilitate this. back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Get in Touch Want a financial consultation with no obligation? Call Dunhams Chartered Accountants now on 0161 872 8671 Or email paul.o’brien@dunhams.co.uk or andrew.edwards@dunhams.co.uk
The Spring Statement 2026
The Spring Statement 2026 The Chancellor held the Spring Statement on 3 March 2026. The government has been keen to have only one tax event per year (the Budget) and so the Spring Statement was intended to provide an interim update on the economy and public finances. Page Content:- The Spring Statement 2026 Personal Tax Employment Capital Taxes Business The Spring Statement 2026 Whilst the Chancellor did meet the commitment not to make major tax announcements, there was plenty to say on the economy more generally. Looking back a year, the previous Statement focused on a commitment to increasing defence spending, cuts to the welfare state and economic growth. Over the last year, the majority of those cuts to welfare spending were not supported by backbench MPs and the economy has continued to grow slowly, so what did the Chancellor have to say a year on? The strap line was that current policies mean that the government has the right economic plan for Britain. The Chancellor stated that the ‘…Spring Forecast has shown that the government’s economic plan to cut the cost of living, cut national debt and grow the economy, is the right one.’ Whilst the speech was highly political, the Chancellor specifically referred to three particular areas to show that the government’s policies were working: Cutting the cost of living – the OBR’s forecast shows inflation, borrowing and debt interest are falling, whilst investment is rising. Cutting borrowing – the OBR’s forecast shows borrowing is down by nearly £18 billion compared to the autumn, with borrowing this year set to be the lowest in six years and falling below the G7 average. Growing the economy – the OBR’s forecast shows GDP per person is now set to grow more than was expected in the Budget, with growth of 5.6% over the parliament. That was what the government said but what did the OBR have to say in its 125-page report? The start of the report stated that the fiscal context for the next Budget will remain challenging, so does this mean even more tax rises? It certainly does not appear that tax cuts are on the way anytime soon. Highlights of the report were summarised by the OBR: productivity growth will pick up to 1% in the medium term labour supply growth will decline, mainly due to lower net migration and population ageing GDP growth will slow down to 1.1% in 2026, before averaging 1.6% over the rest of the five-year forecast inflation will reach its 2% target in late 2026 public sector net borrowing is projected to fall from 5.2 % of GDP in 2024/25 to 4.3% of GDP this year and then to 1.6% in 2030/31 weekly wage growth will slow to around 3.5% in 2026 and then average 2.25% unemployment will rise from 4.75% in 2025 to a peak of 5.33% in 2026, primarily driven by new entrants into the labour market struggling to find work. Of course, the Spring Forecast is exactly that; for example, the effects of the current situation in the Middle East have not been factored into any of the data released by the OBR. The OBR also makes some other important points: the tax-to-GDP ratio is forecast to increase to a post-war high of 38% of GDP in 2030/31 there continue to be pressures on the government’s departmental spending plans there are concerns that the future costs of welfare spending may follow the sharp growth of disability and health caseloads since the pandemic. To summarise, not a great deal of growth appears to be around the corner. Public spending is one side of the equation but taxation is the other, so what does the tax system have to offer over the next year? back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Personal Tax Tax bands and rates The basic rate band remains at £37,700, with the higher rate threshold remaining at £50,270. The additional rate threshold remains at £125,140. The freeze of these thresholds will continue until April 2031. The NICs Primary Threshold and Lower Profits Limit remain at £12,570. The NICs Upper Earnings Limit and Upper Profits Limit will remain aligned to the higher rate threshold at £50,270 up to April 2031. Other employer NICs relief thresholds aligned to the Upper Earnings Limit will also be maintained at this level. The additional rate for non-savings and non-dividend income will apply to taxpayers in England, Wales and Northern Ireland. The additional rate for savings and dividend income will apply to the whole of the UK. Scottish residents The tax on income (other than savings and dividend income) is different for taxpayers who are resident in Scotland from that paid by taxpayers resident elsewhere in the UK. The Scottish Income Tax rates and bands apply to income such as employment income, self-employed trade profits and property income. The rates and bands for 2026/27 are as follows: Band £ Rate % 0 – 3,967 19 3,968 – 16,956 20 16,957 – 31,092 21 31,093 – 62,430 42 62,431 – 125,140 45 Over 125,140 48 Scottish taxpayers are entitled to the same personal allowance as individuals in the rest of the UK. Welsh residents Since April 2019 the Welsh Government has had the right to vary the rates of Income Tax payable by Welsh taxpayers (other than tax on savings and dividend income). For 2026/27 the tax payable by Welsh taxpayers is the same as that payable by English and Northern Irish taxpayers. The personal allowance The Income Tax personal allowance is fixed at the current level of £12,570 and will remain frozen until April 2031. There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000. The reduction is £1 for every £2 of income above £100,000. This means that there is no personal allowance where adjusted net income exceeds £125,140. The government will increase the married couple’s allowance and blind
Who can’t yet sign up for MTD IT?
Who can’t yet sign up for MTD IT? Making Tax Digital for Income Tax (MTD IT) becomes mandatory from April 2026 for sole traders and landlords with qualifying income over £50,000. However, HMRC’s current guidance makes clear that not everyone can sign up yet. If you are preparing early, are you actually eligible? Get more help with your Tax issues. According to HMRC’s sign-up guidance, certain taxpayers are currently excluded from joining MTD IT. These include individuals who: are members of a partnership are subject to bankruptcy or an individual voluntary arrangement have certain complex tax affairs that the system does not yet support do not meet the digital and identity verification requirements. In addition, some taxpayers with particular reporting needs may find that the service cannot yet accommodate their circumstances. HMRC has indicated that functionality is being expanded in stages. If you attempt to sign up and are not eligible, your application will be rejected and you will remain within self-assessment. This does not remove the obligation to join when mandation applies and your circumstances fall within scope. As 6 April 2026 approaches, you should review both your income level and your eligibility under HMRC’s current criteria before attempting to enrol. Checking the guidance in advance can prevent delays and confusion during the transition to digital reporting. back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Get in Touch Want a financial consultation with no obligation? Call Dunhams Chartered Accountants now on 0161 872 8671 Or email paul.o’brien@dunhams.co.uk or andrew.edwards@dunhams.co.uk
HMRC reminds employers about payrolling benefits deadlines
HMRC reminds employers about payrolling benefits deadlines HMRC is reminding employers of key dates and preparations ahead of the transition to real-time payrolling of benefits in kind (BiKs). With an important voluntary registration deadline approaching, what do payroll teams need to know? Find more help with Payroll here! The February 2026 edition of HMRC’s Employer Bulletin highlights important dates and guidance for employers preparing to report BiKs through payroll software rather than via P11Ds. The update forms part of the wider move towards payrolling most BiKs in real time under the new system. The deadline to register for voluntary payrolling of BiKs for the 2026/27 tax year is 5 April 2026. Employers that intend to payroll benefits in the next tax year must complete registration before 6 April 2026, as the voluntary registration service closes once the tax year begins. The Bulletin also reiterates that payrolling most benefits in kind will become mandatory from April 2027. From that point, employers will be required to tax benefits through payroll software and real time information submissions rather than relying on end-of-year P11D reporting. For employers and payroll professionals, the practical points are straightforward: register for voluntary payrolling before 5 April 2026 if you intend to payroll BiKs in 2026/27 ensure payroll software can handle real-time benefit reporting review and plan to change internal processes if you currently rely on P11D reporting With the move to mandatory payrolling now less than 14 months away, employers that delay preparation risk operational pressure during the 2026/27 tax year. back to the menu top If you would like any assistance with any of these points. Please Call Us on 0161 872 8671 Get in Touch Want a financial consultation with no obligation? Call Dunhams Chartered Accountants now on 0161 872 8671 Or email paul.o’brien@dunhams.co.uk or andrew.edwards@dunhams.co.uk