Can I pay my spouse/partner? The definitive answer.

[Fred Bloggs]

The question above is one of the most common questions on this part of CUK. I think this link to an article I found by accident today is the definitive answer to the question and worth sharing. https://www.taxinsider.co.uk/1772-Sp...Tax_Dodge.html

[TheCyclingProgrammer]

I don't know about definitive - the article isn't aimed at Limited companies.

The rule is fairly simple: for any staff remuneration to be allowable for CT it has to be wholly and exclusively for business purposes.

So you can't just pay your spouse a salary for doing nothing and any excessive salary for what they actually do would be treated with suspicion.

It does seem to be fairly well accepted however that if your spouse is a director then that in itself is enough of a responsibility to pay them at least up to the NI threshold of not the full personal allowance.

[WordIsBond]

The article cites a case in which HMRC argued a spouse should have only been paid £8 an hour. Would love to see them try to argue that now, with all the bashing on about Living Wage coming out of government.

In general, it's a pretty good article, though, for those who are self-employed, rather than running a limited company. HMRC calculated the guy's wife should have been paid £1344 / year, he was paying her £90 / week. If he'd paid £150-200 a month they'd have probably never challenged it, it was because he was taking the mick they went after him.

As TCP said, in a limited company if a spouse is a director, some level of compensation is due for being in that role, and HMRC does not have a history of challenging directors' compensation. If you take the mick, you might be the first case they go after, but if you set it at the level most here use, it hasn't been an issue for anyone yet and isn't likely to be.

That's a battle they don't want to try to fight. They'd rather just try to drag everyone into IR35.

[northernladuk]

So the definitive answer is it isn't definitive?

[northernladuk]

It does seem to be fairly well accepted however that if your spouse is a director then that in itself is enough of a responsibility to pay them at least up to the NI threshold of not the full personal allowance.

Must admit I don't quite agree with that. They are paid to a threshold rather than they are actually worth that. If the threshold went up massively I am sure it would suddenly become acceptable to pay them that. I don't believe the value of the threshold has anything to do with the value of the responsibility of being a director.

Maybe I'm just taking the word 'accepted' in a different light.

[malvolio]

The acid test is that magic word "reasonable", which is a fully understood concept in law. A salary of £10k pa is reasonable if you are doing some level of office work or book-keeping, whereas £50k isn't reasonable. However £50k is perfectly reasonable if you are doing income generating work for the company of around that level (or more).

Therefore there can't be a definitive answer as to what is an actual amount. All you can say is compensating for work done or value added is perfectly acceptable.

[TheCyclingProgrammer]

Must admit I don't quite agree with that. They are paid to a threshold rather than they are actually worth that. If the threshold went up massively I am sure it would suddenly become acceptable to pay them that. I don't believe the value of the threshold has anything to do with the value of the responsibility of being a director.

Maybe I'm just taking the word 'accepted' in a different light.

I'm not implying there is a hard link between the threshold and director's remuneration, just that in my observation from here and various other places there seems to be some kind of consensus that paying a director who doesn't do much else for the business up to either the NI LEL or the personal income tax threshold is unlikely to have that level of remuneration challenged.

I know not everyone agrees with this - personally I'm more comfortable paying my wife (who is a Director) £6k a year (so she gets a qualifying year for state pension purposes) than the full £11.5k which I think is slightly excessive for just being a non-working director of a small contracting business - but plenty of accountants seem happy advising a salary up to the personal tax threshold. In practice i don't think this would ever be challenged (for the sake of what, perhaps £1k of extra CT if that?).

I guess the point I was trying to make in my original point and didn't make strongly enough is while the general "wholly and exclusively" rule applies, you'll never get a "definitive" answer. I don't think there is one. There's too many factors to consider.

Is paying a non-executive director of a contracting company that turns over £100k a year - who does nothing other than attend a few board meetings a year - a salary of £50k excessive? Probably. What if the turnover was £10mil? Still excessive? IIRC the board members of TFL get paid a "fee" of £16k a year plus expenses and most of them only have to attend 4 board meetings a year. If they are members of any other committees or panels they get paid more.

[northernladuk]

Yep. I'd go with all the above.

[WordIsBond]

I'm not implying there is a hard link between the threshold and director's remuneration, just that in my observation from here and various other places there seems to be some kind of consensus that paying a director who doesn't do much else for the business up to either the NI LEL or the personal income tax threshold is unlikely to have that level of remuneration challenged.

I know not everyone agrees with this - personally I'm more comfortable paying my wife (who is a Director) £6k a year (so she gets a qualifying year for state pension purposes) than the full £11.5k which I think is slightly excessive for just being a non-working director of a small contracting business - but plenty of accountants seem happy advising a salary up to the personal tax threshold. In practice i don't think this would ever be challenged (for the sake of what, perhaps £1k of extra CT if that?).

I guess the point I was trying to make in my original point and didn't make strongly enough is while the general "wholly and exclusively" rule applies, you'll never get a "definitive" answer. I don't think there is one. There's too many factors to consider.

Is paying a non-executive director of a contracting company that turns over £100k a year - who does nothing other than attend a few board meetings a year - a salary of £50k excessive? Probably. What if the turnover was £10mil? Still excessive? IIRC the board members of TFL get paid a "fee" of £16k a year plus expenses and most of them only have to attend 4 board meetings a year. If they are members of any other committees or panels they get paid more.

This is pretty close to definitive, I'd say.

I'd say if you are going to saddle a spouse (or anyone else) with the legal implications of being a director (or secretary) you should at least pay enough for a qualifying year for the state pension. Otherwise, it seems abusive. If she does bookkeeping, you can easily justify adding a little more to that. If she does payroll for several employees (like mine does), it's easy to justify even more.

So to NLUK's point, it seems to me that there is ONE threshold is indeed indicative of what is fair. It's not the tax one, it's the pension threshold. I think it is unfair to ask someone to take on the role and responsibility / legal liability without paying them enough to get a qualifying year. If that threshold rises, I think it would be unethical not to pay a director-spouse more, to match it.

[northernladuk]

This is pretty close to definitive, I'd say.

I'd say if you are going to saddle a spouse (or anyone else) with the legal implications of being a director (or secretary) you should at least pay enough for a qualifying year for the state pension. Otherwise, it seems abusive. If she does bookkeeping, you can easily justify adding a little more to that. If she does payroll for several employees (like mine does), it's easy to justify even more.

So to NLUK's point, it seems to me that there is ONE threshold is indeed indicative of what is fair. It's not the tax one, it's the pension threshold. I think it is unfair to ask someone to take on the role and responsibility / legal liability without paying them enough to get a qualifying year. If that threshold rises, I think it would be unethical not to pay a director-spouse more, to match it.

Is it fair if the Contractor and wife haven't a clue about the role and the responsibility and just do it because they hear it's a good tax dodge. Hell, most contractors don't even understand if they are employed or not let alone their spouse understand the responsibilities of a director.

They make them a director to be able to pay them for the responsibilities of being a director? Where is the business justification for that?