Wife as a director/employee

[jamwelshtralian]

Hi

I know that this has probably been covered multiple times, but I am getting confused by everyones "hypotheticals" so thought I would ask.

I am looking at reducing my corp tax bill.
Wife currently works as a Teachers Assistant, but is getting fed up with the school so is happy to leave as she gets paid not very much anyway.

• If I "employed" her, to do invoicing, business development etc, would it be worth it?
• How much could I pay her, considering it would be effectively part time work.
• Do I have to pay a private pension (or is that a good thing to reduce the annual profit?).
• What other things do I have to consider in this sort of arrangement?
• What is the most tax efficient way of doing this?

She is already a shareholder (50%) so eligible for dividends, but that obviously comes out after corp tax.

Am new to all this so its all a complete maze to me, and the accountant doesnt seem to be very proactive!

cheers

[malvolio]

If she's a shareholder there are no more financial reasons to make her a director bar one: with a bit of research you can pay pension contributions independently of the usual £40k pa limit on employees. However see the next point: that is unlikely to be a restriction...

Alternatively you can employ her of course, but then should only pay her a salary commensurate with the actual work she does for the company: only MPs can pay £45k to a diary secretary. If she's an employee then you have to consider pension arrangements, but I've not kept up with them: IPSE have a decent guide on their site, as do several other sites.

Don't get side-tracked by tax efficiency. You're talking about salaried income either way, so the usual rules apply and there are no magic shortcuts.

And if your accountant is not being proactive, sack him and get someone who is. You're paying for advice and guidance as well as book-keeping.

[northernladuk]

Hi

I know that this has probably been covered multiple times, but I am getting confused by everyones "hypotheticals" so thought I would ask.

It's been covered many times very clearly. Exactly the same question. You need to understand the hypotheticals as well and apply to your situation. You can't tick box contracting. You need to know it.

I am looking at reducing my corp tax bill.

Ask the agent for 50 quid less a day when you get a gig.

If I "employed" her, to do invoicing, business development etc, would it be worth it?
How much could I pay her, considering it would be effectively part time work.

Don't kid yourself. She won't do squat. At least be honest with the situation if you are going in to it.

What is the most tax efficient way of doing this?

This isn't a question for a bunch of strangers on an internet that have no idea of your situation.

and the accountant doesnt seem to be very proactive!

Sort this out and NOW. If you can't trust your accountant from day one then you are buggered. This is super basic stuff. Get this wrong and it's going to cost you down the line. Contact him and discuss your issues. If it doesn't get better, leave. You can't run a business asking strangers on the internet.

Also if you accountant isn't a freeagent accountant then leave regardless of anything else. Get yourself a good Freeagent accountant and run your business properly.

[Alchemy Accountancy]

As with claiming a tax deduction for any business expense, a salary must be paid on a commercial basis, wholly and exclusively for the purpose of business. It follows that if you employ a family member to carry out a function of the business; firstly, they must actually be working within the business; and secondly, the amount paid to them must be no more than would be paid to a third party in a transaction entered into at arm’s length. Paying a salary for purely tax-motivated reasons is unlikely to stand up to scrutiny in the event of a HMRC enquiry.

The acid test for this is whether you would offer a complete third party, outside of your household or family, the same rate of pay for the same amount of time and the same task – so if you are considering paying your husband, wife or child £50 an hour to answer your phone, fold letters or scan receipts – consider if you would pay me, or anybody else that you don’t really know, the same amount of money to complete the same tasks.

The nature of admin work required by single-person companies is minimal, in most cases rarely over a couple of hours each month and the rate commanded on an open market is unlikely to be more than £10 per hour. For this reason, I’d suggest that for the sake of £20 per month that it is not worth having to later justify this to HMRC, should they make an enquiry into your tax affairs.

[TheCyclingProgrammer]

If she's a shareholder there are no more financial reasons to make her a director bar one: with a bit of research you can pay pension contributions independently of the usual £40k pa limit on employees. However see the next point: that is unlikely to be a restriction...

There is another reason to make a shareholding spouse a director, or at least company secretary: eligibility for entrepreneurs relief if you ever wind up and take a capital distribution. Nobody knows what the future will bring as far as tax rules go but as things stand you could end up paying more tax than is necessary if your spouse is not a company officer.

This only has to be a paper exercise and your spouse would need to be happy with the legal obligations but there’s no need to pay any salary for this role, although it’s a lot easier to justify a nominal salary for taking on this role rather than for simply “doing admin”.

[craigy1874]

As with claiming a tax deduction for any business expense, a salary must be paid on a commercial basis, wholly and exclusively for the purpose of business. It follows that if you employ a family member to carry out a function of the business; firstly, they must actually be working within the business; and secondly, the amount paid to them must be no more than would be paid to a third party in a transaction entered into at arm’s length. Paying a salary for purely tax-motivated reasons is unlikely to stand up to scrutiny in the event of a HMRC enquiry.

The acid test for this is whether you would offer a complete third party, outside of your household or family, the same rate of pay for the same amount of time and the same task – so if you are considering paying your husband, wife or child £50 an hour to answer your phone, fold letters or scan receipts – consider if you would pay me, or anybody else that you don’t really know, the same amount of money to complete the same tasks.

The nature of admin work required by single-person companies is minimal, in most cases rarely over a couple of hours each month and the rate commanded on an open market is unlikely to be more than £10 per hour. For this reason, I’d suggest that for the sake of £20 per month that it is not worth having to later justify this to HMRC, should they make an enquiry into your tax affairs.

Wow, so you advise all of your clients not to pay their spouse a salary then?

[craigy1874]

There is another reason to make a shareholding spouse a director, or at least company secretary: eligibility for entrepreneurs relief if you ever wind up and take a capital distribution. Nobody knows what the future will bring as far as tax rules go but as things stand you could end up paying more tax than is necessary if your spouse is not a company officer.

This only has to be a paper exercise and your spouse would need to be happy with the legal obligations but there’s no need to pay any salary for this role, although it’s a lot easier to justify a nominal salary for taking on this role rather than for simply “doing admin”.

Exactly, or make her a director and there is even more argument for paying a salary. Your wife obviously has to be on board with director's duties and responsibilities though.

[WordIsBond]

As noted, salary has to be for business purposes. Also as noted, the admin work for a one-man band is small.

Exact market rate is going to be hard to pin down, but you aren't going to save very much, for the hassle of it, if you just pay her for admin. If you pay her for admin then you may end up with Pension AE hassles, too. You can probably justify more than £10, contra above, that's barely above minimum wage. You might even justify £15-20, but how many hours would she work a month? 10? Probably not even that much. But even if it were 10 hours at £20, you are only talking £200/month, and the tax savings on that isn't going to go very far. Why give HMRC something to target for such a small benefit?

If she is willing to have the legal liabilities of a director, and you are willing to have her be a director, the picture gets better. There's a business reason for having a second director, it means there is someone who can deal with affairs if you get ill or worse. So making her a director is definitely appropriate and justifiable.

If she is a director, you stay exempt from Pension AE. You can justify a higher salary because you are compensating her for taking on liabilities, etc. No one knows exactly how much this is worth, but that means also HMRC is unlikely to challenge, as far as anyone knows they never have. You can pay her £8.4K without running into NI liabilities, and that gets her state pension credits as well. And, as noted, if you ever end up going for Entrepreneur's relief, her shares are eligible if she is a director. You could even go up to the personal allowance threshold and claim Employment Allowance to save the Employer's NI, if you want the hassle of it.

And, as noted, you can make pension contributions for her as well as for you. Looking way down the road, if all of your pension savings are in your name, then in retirement all of your income is going to be in your name, which means more tax. Building up a pension in her name as well as in yours means lower tax in retirement, assuming the rules are comparable to what they are now.

If you can defer the income, pension contributions are probably an excellent way to save tax. No one knows the future and how it will be taxed when you start to draw on it, but contributions incur no tax at all right now.

So yes, you could make her a director, pay her £8.4K, dump several thousand into a pension for her every year, and save a lot of tax as well as improve the retirement position.

[Alchemy Accountancy]

Wow, so you advise all of your clients not to pay their spouse a salary then?

If a client has a family member who is genuinely working in their business, and is being paid a salary at a market rate for the time spent, then I would not see a problem with it. If salary is being offered to a family member at an uncommercial rate (or for doing nothing), then I see my role as their adviser to outline the potential risks (i.e. how HMRC may view things, if they opened an enquiry) of taking that course of action.

On hearing this, the client may then decide not to pay the salary; they may feel that they can justify the salary in the event of an enquiry; they may feel that the tax saving outweighs the associated risk; they might proceed on low probability of a HMRC enquiry being raised at all; or they may not like my advice and find an accountant that doesn't question this type of thing (I'm yet to come across him/her at my own firm but its early days).

The important thing, for me at least, is that the client is makes a decision having been informed of the benefits and risks. Fully respect that your firm may have a different position on this and trust that your clients are happy with it.

[Craig@Clarity]

I'm with Craig on this one