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?

Open to abuse, by many. Can't believe HMRC haven't tightened up on this.

This is still incredibly common.

Missing out probably the most important one there - the liability.

Perhaps. I wasn't getting into the obligations of a directorship, just pointing out that a director isn't remunerated for "work done" but for actually holding the office.

It is a perfectly legal method of extracting funds and isn't remotely approaching tax evasion as lots of posters on this thread are saying.

"It is a perfectly legal method of extracting funds and isn't remotely approaching tax evasion as lots of posters on this thread are saying."

I agree.

If you are 'employed' but don't actually do any work then it is tax evasion.

Not really. It's tax evasion if you're employed and getting money under the table. If you're on PAYE and legally in the tax system, it can't be tax evasion can it.

It's kind of obvious that if the government were to make it illegal, they would end up in the nonsensical position of having to both define and police what a minimum amount of work would be in order to allow somone to earn a sum of money up to the personal tax allowance.

They must be active in the business and they must receive a commercially justifiable hourly rate. You can't pay a SAHM who occasionally pops to the bank for you £12k pa. You would also need to run a proper payroll and pay the money into their own or a joint bank account in their own right.

HMRC do investigate this as it's easy pickings. If someone is earning £60k in a business with one or two invoices a month and relatively few expenses, there is little commercial need for them to suddenly start employing their spouse on £12k pa. Lo and behold they discover that the spouse's only role is to run the payroll or produce a couple of invoices. This opens up an HMRC enquiry into other aspects of the business...use of home as office expenses, subsistence & mileage claims etc. HMRC can usually recover a nice amount of unpaid tax.

Me and my husband ran a business. He was the director and I was the office manager.

You have to be able to separate you the couple from you the colleagues or it can't work.

My husband once hauled me into his office to give me a bollocking (deserved) and threatened to fire me. (I've been dining out on that story for 20 years 🤣)

We went home together as normal, got the kids sorted, had dinner, went to bed.

I can't stress enough that you cannot take home to work or take work home.

They very very rarely investigate such cases.

I employ my husband in my business. He is part-time, at the moment, because he looks after our 18-month-old the rest of the time.

It works well. We'd previously worked together, so knew we could. We have complementary skill sets. We get on well and don't tend to need a break from each other.

I pay him the market rate for his position and experience. He also has a pension and we do all the H&S etc stuff as required. It works well for us.

They very very rarely investigate such cases.

Really? Certainly not in my professional experience.

How many times have you come across it? And what percentage does that represent?

Enough to make good fees sorting out the mess left behind by unqualified back alley bookkeeper and firms who promise they can reduce anyone's tax bill. People who do it properly like some of those above have nothing to worry about. Those who think it's a good idea because a mate down the pub told them they do it get everything they deserve.

OK. Well I’ve worked at a senior level at a firm of accountants since 1995. We have several thousand clients. A decent proportion of them have paid their spouses a salary. I don’t know of a single enquiry of that nature we’ve had across our entire client base in 28 years.

It's hard on your relationship. My husband became unpleasant to me saying things like 'i wouldn't employ you if you weren't my wife' if I made a tiny mistake. Despite me having several previous employers who were very happy with my work.

I stopped after a couple of years.

I am shocked and appalled by this loophole and the penny has now dropped as to why some SAHMs in the area with Director husbands never want an actual job! This must be very common!!

I think one of my friends is an employee of her DH's company but boy does she work hard!

She does so much for the business. Marketing. Social media. HR support. Logistics. Development. Support for sales. Support to cover staff absence.

The company use an accountant who keep them right.

they would end up in the nonsensical position of having to both define and police what a minimum amount of work would be in order to allow somone to earn a sum of money up to the personal tax allowance.

Or any sum of money really. People should be able to be paid whatever they and their employers agree. You see certain footballers get paid £200,000 a week to kick a ball of air around for a few hours but they are on the books, legit, and pay their taxes.

Thing is, I think it is not that huge a benefit anyway of employment vs. dividends.

Even if you didn't employ a spouse, AFAIK you'd still be able to take dividends out of a business and give them to the spouse free of tax up to the personal allowance.

The only difference would really be that being employed the spouse would get their nics contribution to the state pension, whereas being on dividends only the spouse would not get that.

No the difference is that the salary is corporation tax deductible so there is a saving of 19-26.5% of the salary.

Yes you are right, didn't think of that.

It's still relatively small beer though compared to the amount of tax saved by paying dividends, which is significant if you have a lot of dividend taxed at the higher rate.

Sole-trader/partnership is actually more tax-efficient than a company at high levels now, assuming of course that you draw everything out.

The difference in tax between one person earning £65k and their spouse earning nothing vs one earning £50k and the other £15k, which is what the OP is asking is quite significant because there's two tax allowances to use and no income is taxed at 40%.

Plus in the latter example, the family would also be entitled to CB, which they wouldn't be if all earnings were down to one person.

Doesn't surprise me when corp tax is taken into account.

However for a lot of people the liability would be a big deterrent.