My partner is out of work.
Should I put them on the payroll?
Let’s state the obvious. Having a partner who’s out of work isn’t financially healthy. There’s the obvious drawback of no income. There can be longer-term issues too. On the one hand, your partner won’t be using their tax-free allowance. On the other, they’ll be missing out on credits towards their state pension. The solution is obvious, isn’t it? Just put them on your company payroll. Problem solved. Right? Hmmm – it’s not quite that simple …
Pay them a wage.
The company benefits.
Your partner benefits.
If only it were that easy. Let’s first look at an example. You own a small manufacturing company. You pay tax at 40%. Your wife is Josie and she has no income. James is your friend at the cricket club. He’s an experienced businessman and he tells you of an easy solution. “Put Josie on the payroll at £6,000 a year. You’ll reduce your tax bill by £2,400 (£6,000 x 40%), your NI by £120 (£6,000 x 2%) and your company’s NI by £828 (£6,000 x 13.8%). You’ll be quids in. HMRC won’t be interested … and you owe me a drink!”
Beware the eagle eye of HMRC.
Whereas it’s true, you might get away with this plan, you should ask yourself – “do I really want to be ‘getting away with’ tax avoidance? In the long run, isn’t an open and collaborative relationship with the tax man the best policy?” Of course, HMRC can’t stop you from paying your partner, but they can, if they choose, refuse to allow the corresponding tax relief. The good news is – you’d only lose this relief at 19%. You’d still save on the National Insurance.
Don’t pay Josie more than necessary
NI contributions are, of course, just another form of tax on income. But they do have a special purpose – to qualify the payer for benefits such as maternity pay and the state pension. So, shouldn’t you increase Josie’s pay to the level at which NI Contributions are payable? The answer is ‘no’ – for two reasons :
To qualify for a state pension, Josie only needs to be paid above a certain amount – the National Insurance Lower Earnings Limit (LEL). This is currently £116 per week (£6,032 per year). To qualify, this must be for a full 52 weeks in a tax year. For this to work, the money paid out to Josie must be for ‘gainful employment’ – not for the privilege of simply being your partner. It’s true – maybe HMRC won’t notice. But, they might, which is why being as upfront as possible is always the best policy.
Clarity is all.
You want to be sure of saving tax and accruing social security rights for Josie. The best way to do this is to pay them for the actual work they do with skills they possess. If you tell HMRC that Josie ‘does the books’ and ‘answers the phone’, they will be skeptical. So, think about how, if you’re challenged, you might prove her value to the business. Perhaps like this :
Create a job especially for Josie and support it with a proper, professionally prepared contract. Maybe she’s great at IT, or marketing, or credit control. Perhaps she’s flexible and can work from home. Make these payments, back them up with evidence and HMRC will be happy. So will Josie and so will you.
And of course, the Number 1 lesson? By all means, meet James at the cricket club for an occasional pint. But never take his tax advice. Always check with your Most Money tax experts. We may not be great at cricket. But we do know how to save you tax.
If in any doubt, call us. After all – we’re here to help!
This legal information is not the same as legal advice and you may not rely on our post as a recommendation of any particular legal understanding. Please, consult an attorney if you’d like to get advice on your interpretation of this article.