Paying your spouse a salary

Can I pay my spouse a salary?

When you are in business you might be considering can I pay my spouse a salary through my company? Therefore, this thought could arise when either:

If you can do this, how much can you pay them as a salary? Notably, this is a question that will pop up quite often from contractors and the good news is you can. However, you will need to take an overall look at your business, to see if this something that you would like to do.

When you are running your own company, you may also be an employee in your business. Consequently, as a contractor and the main income generator, you may also be taking a director’s salary.

A family business will often employ members of the family of the person or persons who started the business. Therefore, when you are a business owner, and this includes when you are contractor, you may decide to ask your accountant about employing your spouse. If your spouse or another family member are going to do some work for your company, you can make them an employee and pay a salary for any work that they do. As a result, the salary costs are also an expense and therefore these will help reduce your company tax bill.

Depending on what your spouse earns, it may also be an idea to consider making use of the transfer of the Marriage Allowance. This is not suitable for everyone however you could check if you can claim this.

Paying your spouse a wage -what to consider and what to think about

Is your spouse a higher rate taxpayer?

There is no benefit in paying your partner a salary if they are already earning above the higher rates tax level (£50,270). Consequently, if your company did do this, it would save Corporation Tax (CT) at 19% on the salary cost. However, your spouse would pay PAYE tax on their salary at 40%. Therefore, it would not be beneficial to pay them a salary in this case.

Are they using up their tax allowance?

There is also no real benefit in paying your partner a salary if they already earn enough to use up their personal tax allowance. This is currently set at £12,570 in 2022/23.

As a result, if your company did do this, it would save CT at 19% on the salary cost. However, your spouse would pay PAYE tax on their salary at 20%.

Do they have no other salary or have income less than £12,570 per annum?

In contrast, if your partner or spouse has no other salary or earns less than £12,570 per annum, you could pay them a salary. As a result, your company would make some tax savings. In other words, your company would save CT at 19% on the salary cost, and your spouse would receive the monthly net salary.

Employing and paying your partner a salary

Working and performing tasks for your company

Most importantly, if you are wondering can I pay my spouse a salary, your spouse should be going to do some actual work for your company to justify this. For example, such tasks could be administration type tasks and these could include:

  • Answering the phone.
  • Opening company mail.
  • Dealing with company e-mails.
  • Updating the company’s accounting system.
  • Creating invoices.

If you are paying your spouse yet they are not doing any work, HMRC may challenge the salary in the future.

National Living Wage (NLW) and National Minimum Wage (NMW)

Please note, you will need to pay at least the National Living Wage or National Minimum Wage if:

  • If your spouse is not a director; and
  • Does not have a contract of employment.

The rates change on 1 April every year and are:

23 and over 21 to 22 18 to 20 Under 18

Apprentice

Apr-22 £9.50 £9.18 £6.83 £4.81

£4.81

Apprentices are entitled to the minimum wage for their age. This applies if they are both aged 19 or over and have completed the first year of their apprenticeship.

Can I pay my spouse a salary -what can you pay your partner

Justifying a salary

If you decide to go ahead with this, how much can you can justify as a salary to your spouse or partner?

As a business owner, when you claim for expenses, they should be `wholly and exclusively’ for the purposes of the business. This is one of HMRC’s important guidelines.

In a similar vein, when you pay your spouse a salary, you will need to think about what is the value of the work that they carry out for your business. Therefore, when you are paying your spouse a salary, this should be at a `commercial rate’ for the work that they do for your company. To sum up, what we mean here is that you should consider what you would pay someone else for doing the same work as your spouse.

Tax bands and NI rates

In 2022/23, the tax-free personal allowance is £12,570.

National Insurance applies as follows:

  • Employers are required to start deducting NICs on earnings above the lower earnings limit (LEL). In 2022/23, this is set at £533 per month or £6,396 per annum. At this level, benefits will accrue for the employee’s state pension.
  • The primary threshold (PT) for employee contributions is set at £823 per month or £9,880 per annum for 2022/23.
  • The upper earnings limit is set at £4,189 per month or £50,270 per year for 2022/23.
  • The secondary threshold (applicable to employers) is set at £758 per month or £9,100 per year. There is no upper earnings limit for employer NIC liabilities.

The rates for National Insurance are:

  • 13.25% employee NI for income between the primary threshold and the upper earnings limit
  • 3.25% employees NI for income over the upper earnings limit
  • 15.05% employers NI for income over the lower earnings limit for NIC Classes 1, 1A, and 1B.

A salary above the current personal allowance of £12,570, will also incur income tax at 20%.

Suggestion

When you consider can I pay my spouse a salary, due to the increase in National Insurance rates and indeed the National Insurance bands, an optimal salary to pay your spouse could be £992.33. This is because your company will make more Corporation Tax savings even through there is employer’s NI payable above £533 per month. This level of salary is optimal if your spouse has no other sources of income such as rental profits, self-employment profits, pension income etc that will use up your spouse’s personal allowance. If they do have other income, £823 will be the optimal salary.

Of course, to pay the above suggested salary your spouse needs to be working for your business. In addition, they also need to be putting in enough hours to justify his or her monthly salary.

PAYE scheme

As a company, to be able to pay a salary to you and perhaps your spouse, it will need to be running a PAYE scheme. HMRC will set this up, and your accountant will usually administer this for you. You can find out more about this on the HMRC website.

If you are a sole trader, you cannot pay yourself a salary as you are taxed on your self-employment profits. However, you could set up a PAYE scheme and, once in place, you could pay your spouse a salary for any work that they do for your business.

Operating the payroll

When operating the payroll, your business needs to be able provide:

  • Payslips to its employees each pay period.
  • Make any relevant PAYE/NIC payments to HMRC at least every three months.

Nowadays, with the introduction of the internet, most business will run their payroll through specialist accounting software. In addition, this software will usually come with a licence fee. Therefore, in most cases payroll processing is dealt with by a business’ accountants.

Final thoughts

Many contractors choose to pay their spouse a salary through their company. As a result, the spouse will complete certain duties for the company and these will usually consist of administration type tasks.

Link to Contractor Advice UK group on

LinkedIn https://www.linkedin.com/groups/4660081/

Published On: March 4th, 2021 / Categories: Contractor Tips, Payroll /

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