Paying your spouse a salary

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Introductionpaying wife through limited company 

When you are in business, you might wonder, can I pay my spouse a salary as a contractor while working through my limited company? You may consider whether can I employ my wife to reduce tax and if so, what will the saving be. Therefore, as a limited company contractor or small business owner, the thoughts around whether can I employ my spouse and can I pay my partner a wage could arise when either:

A common thought is that if you can do this then how much can I pay my wife to work for me? Notably, the question regarding can I pay my spouse a salary will pop up quite often from contractors, and the good news is you can. However, when you consider paying your spouse a salary, you will need to look at your business overall to see if this is something you would like to do.

Other initial thoughts

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

A family business will often employ members of the family of the person or persons who started the company. Therefore, when you are a business owner, including a contractor, a limited company employing family members is quite common.

You may decide to ask your accountant about employing and paying your spouse a salary. If your spouse or another family member is going to do some work for your company, you can make them an employee and pay a salary for any work they do. As a result of hiring your spouse as an employee, the salary costs are an expense, which will help reduce your company tax bill.

Depending on what your spouse earns, it may also be an idea to consider using the transfer of the Marriage Allowance. Please note that this is not suitable for everyone. Therefore, you can check the position to see if you can claim this.

Can I pay my wife a salary -what to consider? 

Paying your spouse a salary -are they a higher-rate taxpayer? 

When we look at whether can I pay my partner a wage, there is no real benefit in paying your partner a salary if they are already earning above the higher rate tax level (£50,270). Consequently, if your company did this, it would save Corporation Tax (CT) 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.

Pay wife as an employee -are they using up their tax allowance?

Another consideration when we think about whether can I pay my partner a wage, there is also no real benefit in paying your partner a salary if they already earn enough to use up their personal tax allowance. Notably, this is set at £12,570 in 2022/23.

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

Paying my spouse a salary -is their income less than £12,570 per annum? 

In contrast, when we consider whether can I pay my partner a wage, if your 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 spouse a salary 

Working and performing tasks for your company 

Most importantly, when you look at when can I pay my spouse a salary, your partner 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.

Paying your spouse a salary -the National Living Wage (NLW) and National Minimum Wage (NMW) 

Please note, when we consider how much can I pay my wife to work for me, you will need to pay at least the National Living Wage or National Minimum Wage if:

  • If your spouse is not a director; and
  • They do 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. Please note that this applies if the apprentice is a) age 19 or over and b) they have completed their first year of apprenticeship. 

How much can I pay my wife to work for me? 

Putting spouse on payroll -justifying a salary for them

If you decide that you would like to pay your partner a wage, how much can you justify as a salary for them?

As a business owner, when you claim expenses, they should be `wholly and exclusively’ for the purpose of the business. Notably, this rule is one of HMRC’s essential 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 they do for your company. To sum up, we mean here that you should consider what you would pay someone else for doing the same job as your spouse.

Paying wife through limited company -the 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% employees’ 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% employer’s 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 -paying spouse a salary 

When you consider paying your spouse a salary, due to the increase in National Insurance rates and the National Insurance bands, an optimal salary when you pay your wife as an employee could be £992.33. Please note that this is because your company will make more Corporation Tax savings even though there is an employer’s NI cost payable above £533 per month. This salary level 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 have other income, £823 will be the optimal salary.

Of course, your spouse needs to work for your business to pay the above-suggested salary. In addition, they also need to be putting in enough hours to justify their 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. The PAYE/NIC on any salaries will be part of your contractor taxes.

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

Paying wife through limited company and operating the payroll

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

  • Payslips to its employees each pay period.
  • Make any relevant PAYE/NIC payments to HMRC 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, a business’ accountants deal with payroll processing.

Can husband pay salary to wife -saving company tax 

Any salaries that you pay will be regarded as a company expense. As a result, when we consider whether can I employ my wife to reduce tax, the salary that you pay to your wife will save Corporation Tax at the current rate of 19%.

Final thoughts 

Many contractors choose to pay their spouse a salary through their company. As a result, the spouse will complete specific company duties, usually administration-type tasks. In return, they will receive a salary and this will save company tax.

Link to Contractor Advice UK group on

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

Published On: August 1st, 2022 / Categories: Contractor Tips, Payroll /

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