Advantages of paying wages to your wife/husband etc

Should you pay wages to your wife/husband/partner/children to save tax? Your spouse/civil partner may have no income at all, and almost certainly your children don’t. This means they are wasting their tax free personal allowance of about £12,500 every year. Even children are entitled to a personal allowance!

Let’s say you pay your wife wages of £9,000 per year. If they have no other income they usually pay no tax or national insurance on that. Also you may be able to reduce your business profits and tax.

If you pay just 20% income tax and 9% Class 4 National Insurance on your business profits this could save you about £2,600 on each salary. And how many children do you have to pay wages to?

Also, try to pay wages above the NI lower earnings limit for the year. This is about £6,500. This will help towards securing a full state pension.

Pitfalls of paying wages to your wife/husband etc 

STOP! It’s not quite that simple. To pay wages to your wife/husband/partner/children like this you need to follow the following rules…

We can help you decide whether or not it is reasonable to pay wages to your wife/husband/partner/children. We can also run the payroll for you so that you comply with all the HMRC RTI payroll regulations. Contact us for more details, or get an instant quote for payroll, accounts, tax and more on our website.

Parents on higher incomes who continued to receive Child Benefit after January 2013 have been reminded that they must register for Self Assessment Tax Return by 5 October 2013 to avoid any penalties in relation to the High Income Child Benefit Tax Charge.

If you or your spouse/partner claim child benefit, and either one of you have income of over £50,000 per year, your family will be subject to the child benefit tax charge to claw-back part or all of the child benefit paid from 7 January 2013. The child benefit tax charge must be paid by the higher earner in the family irrespective of who actually receives the child benefit.

 

If you are the higher earner in the family, you will need to report the amount of child benefit the family receives on your self-assessment tax return. For 2012/13 this is only the child benefit received after 7 January 2013, but in future years it will be the full amount of child benefit received in the tax year. This will lead to a charge added to your tax bill due by 31 January 2014, or the charge may be collected through your PAYE tax code in 2013/14.

If you want to avoid paying the child benefit tax charge you and your partner/spouse can:

a. elect not to receive child benefit from 7 January 2013; or
b. reduce the higher earner’s adjusted net income.

You will be able to reverse the election in a) if your income drops, but you may miss out on some child benefit due to timing issues. Thus if your income is likely to be variable making an election not to receive child benefit is unlikely to be the best solution.

Your  ‘adjusted net income’  could be reduced by using any or all of the following methods:

Please contact us about how to undertake any of these ideas to avoid or reduce your child benefit tax charge before trying to implement them to ensure they are appropriate in your own circumstances.

If you need to register, we can do that for you if you would like us to do your tax return from £50pa plus VAT. See our tax services  or get an instant quote for more detail.

Parents on higher incomes who continued to receive Child Benefit after January 2013 have been reminded that they must register for Self Assessment Tax Return by 5 October 2013 to avoid any penalties in relation to the High Income Child Benefit Tax Charge.

Parents on higher incomes who continued to receive Child Benefit after January 2013 have been reminded that they must register for Self Assessment by 5 October 2013 to avoid any penalties in relation to the High Income Child Benefit Charge.

This month, HM Revenue and Customs (HMRC) will be writing to around two million higher rate taxpayers, including those affected by recent changes to Child Benefit. The letter reminds them that if their income is over £50,000 and they or their partner received Child Benefit in 2012/13, they will need to complete a Self Assessment tax return for the 2012/13 tax year. They must register now with HMRC for Self Assessment if they have not already done so.

The High Income Child Benefit Charge came into effect on 7 January 2013. You are liable to pay the tax charge if all of the following statements apply, or applied to you in the 2012/13 tax year:

  • you have an individual income of over £50,000 a year, and
  • either you or your partner received any Child Benefit payments after 7 January 2013, and
  • your income for the tax year is higher than your partner’s. The partner with the higher income is liable to pay the charge if both partners have income over £50,000.

People who stopped Child Benefit payments before 7 January 2013 do not need to take any further action. To check whether the tax charge applies and to register, go to http://www.hmrc.gov.uk/childbenefitcharge.

If the charge does apply, then you must register for Self Assessment for the 2012/13 tax year by 5 October 2013, so that you can declare the Child Benefit you received, pay the tax charge on time and avoid any penalties.

You might be able to come out of Self Assessment in future years if you (or your partner if they are the Child Benefit recipient) choose to opt out of receiving Child Benefit and avoid incurring the tax charge. Go to http://www.hmrc.gov.uk/childbenefitcharge if you want to opt out.

More information on whether you need to register for Self Assessment can be found at: http://www.hmrc.gov.uk/sa/need-tax-return.htm.

We can help you register for self assessment and our fees for completing your tax return start at £50pa plus VAT.

Q. I formed my new company in November 2012 and I pay wages to my wife because she became a director and employee of that company at that time and does work for the company. My wife is now expecting our first child in August 2013. Can our company pay my wife statutory maternity pay?

A. Unfortunately your wife has not worked for 26 weeks for her employer before the 15 weeks prior to birth, so statutory maternity pay is not due. There is nothing to stop your company from paying your wife her normal wages while she is on maternity leave, but as those wages do not amount to statutory maternity pay the company can’t reclaim that pay from the tax office.