Employing your spouse

When considering the overall tax position of your family, it is worth considering employing your spouse in your business.

This is a means of transferring income from you to your spouse. It is likely to show a tax saving if your spouse has unused personal allowances or pays tax at a lower rate than you do.

In order to justify a salary, the following points must be borne in mind:

  • The level of salary must be commercially justifiable.
  • The salary must actually be paid to your spouse (and therefore affordable for you).
  • The National Minimum Wage regulations are likely to apply.

As well as a salary, you may be able to pay premiums for a special pension arrangement for your spouse. These should not be taxable on your spouse and should save you tax as a business expense.

It may also be possible to provide your spouse with a 'company car', which should not give rise to any tax charge if the combined annual salary and notional benefit-in-kind are below £8,500, although again the need for commercial justification should be borne in mind.

All the above considerations apply equally to an unmarried partner or indeed to any other individual.

ADMINISTERING A SALARY

If your spouse has no other employment, a Form P46 should be signed with the Statement A ('This is my first job since last 6 April') ticked. You may then pay up to the Primary Threshold for employees’ national insurance (£162 per week for 2018-19) without any further formality.

If you already have a PAYE scheme for other employees or don't mind setting up a scheme for your spouse, you should consider the following points:

  • A salary under £162 per week will protect an entitlement to basic state pension and other contributory benefits without incurring any actual national insurance liability
  • A salary between £162 and £892 per week is subject to employees' national insurance at 12% and employers' national insurance at 13.8%
  • The income tax position depends on your spouse's personal circumstances
  • The amount of salary exceeding £892 a week is subject to employees' national insurance at 2% and employers' national insurance at 13.8%, without an upper limit

All tax rates and allowances are for tax year 2018/18.

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