Section 660a rules were originally introduced to prevent family members reducing their overall tax liabilities by gifting income or assets to lower rate tax payers within the family.
In respect of freelancers and contractors the “gifting” of income relates to company shares being split normally between husband and wife.
This allows the use of two personal allowances and two Income Tax basic rate tax bands before any family dividend income is taxed at the higher rate of Income Tax.
From H.M. Revenue & Customs point of view the wife’s dividend income has derived from her husband’s work i.e. from the shares the husband has “gifted” to his wife.
As such, H.M. Revenue & Customs may attempt to tax the wife’s dividend income as if it had been received by her husband. This would create further Income Tax to pay if the husband’s income is large enough to reach the higher rate threshold for Income Tax.
If you are a knowledge based worker and your spouse, parents or siblings own shares but do not work for the company, then it is possible that H.M. Revenue & Customs could enquire into the position.
Such enquiries are extremely rare, however, as a freelancer or contractor you need to be aware of the legislation.