When considering the overall tax position of your family, it is worth considering if you can justify 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 and wholly and exclusively incurred in the course of the trade
- The salary must actually be paid to your spouse (and therefore affordable for you)
- The national minimum or living wage regulations are likely to apply unless the business is a self employment, where the "family member" exemption may apply
- If the salary is sufficient (over £10,000 per annum) there may also be an obligation to implement a workplace pension scheme and enrol them in it.
It is important to apply the same principles when paying a spouse as you would when employing someone not connected to you.
As well as a salary, you may be able to pay premiums for a special pension arrangement for your spouse even if they are not required to be enrolled in auto-enrolment.
These should not be taxable on your spouse and should save you tax as a business expense provided that the overall salary package is reasonable in relation to the work done.
The total salary package is the amount which is considered when deciding whether the payments are justified under the wholly and exclusively rule.
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, the starter form (previously P46) should be signed with the Statement B ("This is my only or main job") ticked. You may then pay up to the Lower Earnings Limit (£118 for 2019/20) without any further formality, provided that you have no other employees.
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 between £118 and £166 per week will protect an entitlement to basic state pension and other contributory benefits without incurring any actual national insurance liability
- A salary between £166 and £962 per week is subject to employees' national insurance at 12% and between £162 and £892 employers' national insurance at 13.8%, although you may be able to claim Employment Allowance which reduces the employer national insurance bill by up to £3,000 a year
- The income tax position depends on your spouse's personal circumstances
- The amount of salary exceeding £962 a week is subject to employees' national insurance at 2% and employers' national insurance at 13.8%, without upper limit