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How much will the income splitting legislation cost you?

Published on Dec 12, 2007 |

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Do you share dividend income with your spouse in your family company?

Those contractors who do will pay a significantly higher amount of tax under the new income shifting proposals put forward by the Treasury last week.

You can use the specialised Income Shifting Calculator from Contractor Calculator to see how much more you will have to pay.

Contracting industry legend, Dave Chaplin, has determined the following breakdown under the new income shifting tax law:

Income Shifting Calculation

Take the following typical scenario. A husband and wife both work at a contracting business, and each owns 50% of a contracting business, but only one partner provides a service with a clear market value. Both earn an annual salary of £6000. The company however makes an annual profit of £100,000.

So we input the following into the specialised calculator:

Salary £6000
Salary £6000
Profit £100,000
Dividend 50%

The calculator determines that the couple's current combined net annual income is £86,892, and current combined annual taxes are £25,311.

What is the Income Shifting liability?

The couple are caught by the proposed legislation since only one partner provides services with a clear market value. As they are caught within the Income Shifting Legislation (thus removing dividend splits), their tax bill could increase by £7,611 (30%) to £32,923.

The couple's net income would then decrease by £7,611 (8.76%) to £79,281 per year.

Keep an eye on the latest developments in Contract Eye's dedicated Income Shifting section.