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    Default Employing wife

    HI, I just wanted to get the forums thoughts on employing my wife through the ltd company. My wife doesn't work and it seems to make economical sense to employ her through the company in order to utilise the personal allowance as well as getting her assistance for administrative tasks.

    However, I'm wondering whether such arrangements are likely to be questioned by HMRC and what precautionary steps i can take to minimise the risk of HMRC disputing the payments.

    Thanks
    DC12

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    Hi

    You can employ your wife, and as long as you pay her a reasonable salary for the work she does at market rates, this will be fine. However, effective tax planing will require more information to ensure you are exploring all other options to maximise your take home income.

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    For any business expense to be permissible, it must be wholly and exclusively for business purposes. Personal tax efficiency is not a business purpose, so you can't just pay your wife 45K because that "saves taxes." It has to be legitimately for a business purpose.

    You can pay her a reasonable rate for bookkeeping / administrative tasks, but for a one-man band there aren't enough administrative tasks to justify paying very much.

    You can make her a director of your company. This serves a business purpose, in that if you die or become ill she can oversee disbursement of company funds, selling of any assets, closing the company, etc. And a director has legal liabilities and so should be compensated with a director's stipend. I've never heard of HMRC challenging a spouse's director's stipend, but it's probably not a good idea to take the mick with a huge one, and not tax efficient under current taxation, anyway.

    There's an ethical argument that if you are going to be employing her part time you should at least be paying enough to give her state pension eligibility. I don't remember the amount, it's something like 5800. It may be hard to justify paying that much for bookkeeping. It's not hard to justify paying a director's stipend of that amount, especially if also doing administrative tasks.

    The most tax-efficient method is to pay your spouse up to the personal allowance. Again, it is hard to see HMRC challenging that if she is a director, but it certainly would seem high if she is just being paid a salary for bookkeeping. If both of you are earning to the personal allowance, you can claim the Employment Allowance which will cover any employer's NI. Employee NI will still be due on the difference between the personal allowance and 8K, but you will save on corporation tax. If you don't want the hassle of having to pay NI, you can just limit salaries to 8K, the tax cost of doing so is not particularly significant.

    The other big (actually, the biggest) step you can take to gain tax efficiency is to make your spouse a shareholder. It's been discussed at length around here, search the site for discussions. This allows her to benefit from the dividend "allowance". It also means you can disburse a lot more dividends without getting into the higher rate band.

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    Many existing threads on this topic in which it's been discussed in great detail.

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    Quote Originally Posted by WordIsBond View Post
    For any business expense to be permissible, it must be wholly and exclusively for business purposes. Personal tax efficiency is not a business purpose, so you can't just pay your wife 45K because that "saves taxes." It has to be legitimately for a business purpose.

    You can pay her a reasonable rate for bookkeeping / administrative tasks, but for a one-man band there aren't enough administrative tasks to justify paying very much.

    You can make her a director of your company. This serves a business purpose, in that if you die or become ill she can oversee disbursement of company funds, selling of any assets, closing the company, etc. And a director has legal liabilities and so should be compensated with a director's stipend. I've never heard of HMRC challenging a spouse's director's stipend, but it's probably not a good idea to take the mick with a huge one, and not tax efficient under current taxation, anyway.

    There's an ethical argument that if you are going to be employing her part time you should at least be paying enough to give her state pension eligibility. I don't remember the amount, it's something like 5800. It may be hard to justify paying that much for bookkeeping. It's not hard to justify paying a director's stipend of that amount, especially if also doing administrative tasks.

    The most tax-efficient method is to pay your spouse up to the personal allowance. Again, it is hard to see HMRC challenging that if she is a director, but it certainly would seem high if she is just being paid a salary for bookkeeping. If both of you are earning to the personal allowance, you can claim the Employment Allowance which will cover any employer's NI. Employee NI will still be due on the difference between the personal allowance and 8K, but you will save on corporation tax. If you don't want the hassle of having to pay NI, you can just limit salaries to 8K, the tax cost of doing so is not particularly significant.

    The other big (actually, the biggest) step you can take to gain tax efficiency is to make your spouse a shareholder. It's been discussed at length around here, search the site for discussions. This allows her to benefit from the dividend "allowance". It also means you can disburse a lot more dividends without getting into the higher rate band.
    Not anymore, according to my accountant. I think it was changed so that it needs to be at least one non-director employee.

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    Quote Originally Posted by FrontEnder View Post
    Not anymore, according to my accountant. I think it was changed so that it needs to be at least one non-director employee.
    The evidence says there are three possibilities here:

    1. Your accountant doesn't know what he's talking about.
    2. You misunderstood what he said.
    3. You forgot what he said.

    I'm betting on #2 or #3, probably #2.

    Further details here, see #14, and especially the final example at the bottom of the page. Hard to make this much more clear than it is....

    Q Ltd employs two paid directors. Both are paid above the Secondary Threshold (set at 8,112 a year in 2016 to 2017 for directors). The company is eligible to claim the Employment Allowance for the whole tax year.

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    Quote Originally Posted by FrontEnder View Post
    Not anymore, according to my accountant. I think it was changed so that it needs to be at least one non-director employee.
    There was some confusion for a while, but our understanding is that with two people on payroll, provided both earning above secondary threshold, then they can claim the employment allowance. This is even if they're husband and wife, also irrespective of whether they're directors or not.

    Having said that, I know a few accountants that are of the attitude HMRC clearly hate it (it's not what the motive of the employment allowance was), the gain is fairly modest, and it's extra hassle, so to recommend against it anyway.

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    The company can claim the Employment Allowance as long as two employees or directors are paid above the Secondary Threshold. The HMRC ' Single-director companies and Employment Allowance: further guidance' clarifies that this includes companies where:

    - all employees are directors where both earn above the Secondary Threshold
    - the company employs husband and wife directors where both earn above the Secondary Threshold

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    Would that employment require a contract and therefore be subject to NMW etc so not just the fact the director is getting 8k pay?
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    Quote Originally Posted by northernladuk View Post
    Would that employment require a contract and therefore be subject to NMW etc so not just the fact the director is getting 8k pay?
    Nothing in the guidance or the legislation requires that.

    NMW wouldn't be an issue, anyway. A spouse doing admin type stuff is unlikely to work more than 10 hours a week. That works out to 500 hours a year, that's 16 / hour for 8K, 23 / hour for 11.5K.

    AE for pensions would be a requirement if there's an employment contract, however. So the employment contract for a director/spouse is probably a bad idea. (It's not a bad idea, however, to pay into a SIPP for a spouse.)

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