Employing a spouse in a business

[Orangesandlemons77]

I have seen some people mention that e.g. their DH employs them to use their tax free amount in a business

Does anyone do this and how does it work / do you find it please?

Your partner can pay you up to £12.5k to work for him/her and you don't need to pay tax on that.

Thanks

Does anyone do this please and how does it work in practice?

I think you're actually supposed to do some work, at a reasonable rate. So not £12.5k pa a couple of hours a week admin.

Otherwise, it could be picked up as tax avoidance/evasion.

So your DH would register you as an employee of his business, you'd do the work, and he'd pay you.

He would also be responsible for complying with employment law (NMW, H&S etc).

Either he employs you and pays NI etc or you could be a Director and draw dividends

Some spouses are made directors, so they get equal dividends at lower tax rates.

Yes, people do it all the time.

There can be issues, but easy enough to comply with legislation.

Dividends are nothing to do with directorships.

Shareholders receive dividends.

Directors can also be shareholders, but neither follows from the other.

You are correct, apologies to OP
I am a Director AND Shareholder, which is why I take divis

You can get up to the tax free amount tax free and then pay tax on anything above that as normal. Company will have to pay ni but there is something called employees allowance that gives the company an allowance if the NI bill is low.
Also get dividends but allowance is now £1k a year tax free so no longer the great tax scheme it was.

So how does this work out for people on a more general level, how does it feel being paid by a spouse, do you do any other work as well etc. Thanks

I find that it happens in established family relationships where there is already a level of higher income from one spouse and pooled finances - so the "being paid" by a spouse isn't really a thought process.

Assuming the business is a company then I'd generally expect a set up with split shareholding and both spouses to be appointed as directors.
Small directors salaries (as office-holder remuneration, not for work done) to utilise personal allowance (or restricted to NI LEL as appropriate) and then dividends split as per the shareholdings to utilise the lower tax rate on dividends up to the top of the basic rate band (although changes to dividend and CT rates have eroded the previously big tax differentials).

If the business is a partnership or self employment then it is a different ball game.

I have a couple of friends who have this arrangement, they are both SAHP to school aged children and they don't do any actually work, but they are not career minded people & don't want to incur any childcare costs.

It gives them a tax free income & credits towards the state pension.

The only downside is that it obviously prevents them from getting an actual part-time job as they would have to pay quite a bit of tax.

Its obviously a bit unfair on those of us who don't have company director husbands & have to get real jobs thought!!

The other downside is that its tax avoidance & they could be prosecuted if HMRC find out.

How are they not working and have a tax free income?!🤔

Yes I often wonder this myself!! I guess HMRC don't have time to check on small fry tax avoidance, but it does seam a little unfair. Of of my friends has been doing it for 10+ years!! If they did check, I guess they could probably say they do some admin etc...would be very difficult to prove I guess. I'm amazed its allowed tbh!!

It's not allowed! If you are 'employed' but don't actually do any work then it is tax evasion. Same as if you pay a workman in cash so they don't run it through their books. But it is up to HMRC to investigate, which is the risk you take. And also up to your own moral position

You can be a shareholder in your spouses company and receive dividends without doing any work - that is a different thing. But then it means you own part of the company and that can get messy if you split up.

You can also be a director and remunerated for holding the office of a director (that has duties and responsibilities but doesn't necessarily require "work").

I find it odd/stupid they tell friends they do this. If one of their friends informs HMRC they could get into a lot of trouble. And you are right, its totally not fair that they are doing this.

But it isn't necessarily illegal, if they have set it up right (ie director & renumeration for that & shareholders with dividends) it is totally fine and would be advised by their accountant.

There is the Marriage Tax allowance though, but that is only for a smaller amount of money

It’s not allowed- it’s tax evasion

This would never happen in reality, though.

Marriage tax allowance is only worth about £200 a year, and its only for standard rate tax payers. Thats unlikely to be the case if you are receiving enough money to bother to set up a spouse in the business as a tax saving.

Not really any more