Paying your spouse or partner from your company to save tax
If your spouse / partner has no (or low) taxable income, they will be wasting their tax-free allowance and losing state pension rights; paying them from your company might be a benefit.
The tax and NI consequences of a business owner paying their spouse a salary is often subject to HMRC enquiry because it can save tax for you and your company, particularly if you are a higher rate tax payer.
A spouse on the payroll at £500 per month will have no tax or NI bills to deal with, whilst the company will save corporation tax (CT) equal to 19% of the annual salary. It also means that the spouse salary reduces the need for dividends and consequently saves personal tax for the owner.
If HMRC discover that the spouse has been included on the payroll there’s a strong possibility that they will ask questions about the spouse’s role is in the business. HMRC doesn’t seek to stop the salary (and it cannot) but it can disallow the deduction from profits for tax, for any of the salary it believes is not justified by the work carried out.
HMRC could even seek to argue that because the spouse provides no services to the company, the salary is actually a gift from – and taxable on – the owner. Even if the salary is over the NI lower earnings threshold, unless it is paid for “gainful employment” it doesn’t count as earnings for NI purposes and won’t qualify for pension credits; not perhaps normally obvious to HMRC but might be spotted if it’s the situation is already being challenged.
There is a way however for a spouse to play a genuine role in the business even if they don’t have the skills to be involved with the trade. HMRC won’t object to a salary paid for management services, such as looking after the company’s statutory obligations e.g. dealing with Companies House or your accountants, helping with admin or systems – or you could also make your spouse a non-executive director. Being an NED doesn’t have to involve much work but justifies a salary because it involves taking on the legal responsibilities of a director.
For tax saving tips contact us – call Marie Sheldrake, Tom Hulett or Mike Wilcox on 01225 445507