Reply to: Wife as a director/employee

[Scruff]

Jeez

I don't really think that there is any more than 30-60 minutes admin work, per month in MyCo.?

Import transcations into Free-Agent weekly
"File" receipts (scan electronically)

There is no way that I can justify paying my wife a salary, even though she is a Shareholder.

I (was) an accountant, but IANYA.

[Platypus]

Reduce your CT bill by dumping large sums into a SIPP.

[craigy1874]

IMHO it would take a particularly brave inspector to challenge on this point. Their argument basically needs to be "your spouse isn't worth that much". You can imagine it making tabloid front page "How very dare the government suggest I'm not worth £X".

I agree, the whole thing is subjective, but it is up to the client to decide (with our assistance). In all the years I have done this job, I have had ZERO queries or enquiries into this from HMRC.

Be commercial and be sensible and you will not have any issues.

[Maslins]

But I don't see how anyone gets anywhere near £8K with a one-man band without making the spouse a director. It may not be enough for HMRC to bother with it but it seems like in a lot of cases it would be an easy win for them.

IMHO it would take a particularly brave inspector to challenge on this point. Their argument basically needs to be "your spouse isn't worth that much". You can imagine it making tabloid front page "How very dare the government suggest I'm not worth £X".

[WordIsBond]

It would therefore take a stretch of the imagination, in my opinion at least, to reach a salary that is both commercial and tax efficient in a husband/wife fee-earner/admin scenario.

Yes, very clearly so. We have several employees and my wife still probably doesn't work more than 15 hours a month, and I don't think even she would argue she should be paid £50 / hour. Especially since she gets the tremendous unpaid benefit of being married to me! (I hope nobody tells her I said that....)

I think it is pretty easy to argue a non-exec director's stipend of £5K is appropriate (we've got turnover near £400K), and I also think a bookkeeper's salary of £3K is pretty reasonable. Combine the two and she's at £8K. But I don't see how anyone gets anywhere near £8K with a one-man band without making the spouse a director. It may not be enough for HMRC to bother with it but it seems like in a lot of cases it would be an easy win for them.

[Alchemy Accountancy]

Or somewhere in between based on the fact that there is no such thing as a 'market level' for admin work. There is a range of rates and an average and OP can always claim that a spouse provides higher value than just an off-the-shelf bookkeeper, and should be at or near the top of the range, at least.

A spouse can provide better value because:
1. Willing to be flexible as to number of hours and schedule, happy to work 2 hours one month and 20 hours at year end, as needed, etc.
2. Knows the business better than a bookkeeping service would
3. Does more than a bookkeeper by taking part in discussions about business decisions (which contract should I take, should we get this laptop, etc)

I agree that there is a range of rates/hours that could be appropriate for the nature of work undertaken - I would consider the 'market rate' to be somewhere within that range (placement within this range is clearly highly subjective). Likewise, I agree that the factors you describe could add value and so could enhance the rate - however even the enhanced rate will have a ceiling somewhere.

Lets say (to illustrate my point) that the 'market rate' with these enhancements is £50 per hour - a full time equivalent salary of c.£100k per annum or £400 per day - a well paid administrator, in my opinion at least. To get to the salary which is most tax efficient (I'll use £8k - close enough to the case for most), they would need to do 160 hours work per year, or 13 hours each month. In my experience of contractor businesses (and I am generalising here - so of course there will be exceptions), the administrative requirements are fairly straight forward and unlikely to take more than a few hours per month. It would therefore take a stretch of the imagination, in my opinion at least, to reach a salary that is both commercial and tax efficient in a husband/wife fee-earner/admin scenario.

[northernladuk]

Or just ask the client if he's taking the piss and his wife will never lift a finger as per 99.9% of these situations.

[WordIsBond]

Are you suggesting that an admin level salary/minimum wage would be appropriate? i.e. salary be paid at the market level for admin work (assuming it is admin work that is being completed - or at an appropriate level for the nature of work if not admin).

Or are you suggesting that the wage should be set according to what is most tax efficient for the couple? i.e. regardless of commerciality, that salary should be set at a level which saves the most tax.

Or somewhere in between based on the fact that there is no such thing as a 'market level' for admin work. There is a range of rates and an average and OP can always claim that a spouse provides higher value than just an off-the-shelf bookkeeper, and should be at or near the top of the range, at least.

A spouse can provide better value because:
1. Willing to be flexible as to number of hours and schedule, happy to work 2 hours one month and 20 hours at year end, as needed, etc.
2. Knows the business better than a bookkeeping service would
3. Does more than a bookkeeper by taking part in discussions about business decisions (which contract should I take, should we get this laptop, etc)

[Craig@Clarity]

I'm uncertain of your position is on this Craig, perhaps you could provide some clarity, for the benefit of other CUK readers?



Are you suggesting that an admin level salary/minimum wage would be appropriate? i.e. salary be paid at the market level for admin work (assuming it is admin work that is being completed - or at an appropriate level for the nature of work if not admin).



Or are you suggesting that the wage should be set according to what is most tax efficient for the couple? i.e. regardless of commerciality, that salary should be set at a level which saves the most tax.

Thanks,
Craig

What I'm saying is that as accountants, we should only be advising on what levels of salaries to consider and what affect that has. We can't go "telling" the client they should take a certain level of salary as that is not our place to do so. In the same breath I'm answering the OP question on what is tax efficient and advising him his accountant should be able to give examples of that.

[Alchemy Accountancy]

I'm uncertain of your position is on this Craig, perhaps you could provide some clarity, for the benefit of other CUK readers?

In terms of what level of salary to pay her your accountant can only advise of what you should consider e.g. an "admin" level of salary or perhaps minimum wage.

Are you suggesting that an admin level salary/minimum wage would be appropriate? i.e. salary be paid at the market level for admin work (assuming it is admin work that is being completed - or at an appropriate level for the nature of work if not admin).

They should be able to provide examples and advise on what is the most tax efficient level but they ultimately can't tell you you should go for X amount. They can give you the pro's and con's at different levels but you need decide based on informed advice.

What you will need to consider is the timing and how much she's earned from teaching as this potentially affects what tax she has to pay through your company which might make it less tax efficient.

Or are you suggesting that the wage should be set according to what is most tax efficient for the couple? i.e. regardless of commerciality, that salary should be set at a level which saves the most tax.

Thanks,
Craig

[Craig@Clarity]

In all seriousness though, if she decided to quit her job and be put on your payroll, there is no issue with that. She's already a shareholder which is great as others have justified. Consider making her a director again for the reason others have said and employment issues. In terms of what level of salary to pay her your accountant can only advise of what you should consider e.g. an "admin" level of salary or perhaps minimum wage. They should be able to provide examples and advise on what is the most tax efficient level but they ultimately can't tell you you should go for X amount. They can give you the pro's and con's at different levels but you need decide based on informed advice.

What you will need to consider is the timing and how much she's earned from teaching as this potentially affects what tax she has to pay through your company which might make it less tax efficient. You're best actually speaking to your accountant and the precise figures. You mentioned they're not proactive but these sort of questions should stoke the fire.

In terms of tax efficiency, making company pension contributions will reduce your CT bill but you'll want to consider how much you want to contribute and tie up until retirement. IFA's are best placed to advise you on what to invest in and how much. Not an accountant's place to advise.

Make sure you're advised on what you can and can't claim through your company such as food, travel and accommodation, equipment, use of home, phones, internet, insurances etc.

[Craig@Clarity]

I'm with Craig on this one

[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.

[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.

[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.