Family Archives | CloudBook Online Accountants Ltd

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…

- It must be for work actually done. Now it’s going to be tough to argue your 2-year-old son is working for you but many spouses/civil partners do work and mature children may also help out. Maybe they do the books, answer the phone, stuff envelopes, etc. Keeping out of your way so you can get on doesn’t count, as valuable as it may be. Draw up a list of their responsibilities to help your case. At the moment they might do it for free, maybe because it’s a family business, but they can be paid for it. If you make your spouse a director, all the responsibilities imposed by Company Law by taking on this role must be worth something. You can also pay a family member a wage where you have property that you rent out and the individual manages the properties.

- It must be a reasonable wage rate appropriate with what they actually do. How much would you pay someone unrelated to do the job? The national minimum wage level is at least a good place to start but pay a higher wage if you can justify it.

- You must actually pay the wages. It’s no good the accountant just putting it through the accounts at the end of the year. Pay it, ideally through the bank rather than cash so that it’s easy to prove it’s been paid. Also, don’t forget to record it in your accounting records.
- Children under the minimum school leaving age can only work a limited number of hours per week and local by-laws may restrict them further.
- You must comply with any PAYE procedures as you would do for normal staff, including RTI and Auto Enrolment.

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:

Pay more personal pension contributions in the tax year. Make sure these contributions are paid by you and not by your employer.
Increase the Gift Aid donations you make. Channel all the Gift Aid donations made by the family though the higher earner’s bank account. Remember Gift Aid donations can be carried back to give relief in the previous tax year, if the donations are made before the tax return for that earlier tax year is submitted.
Reduce the amount of income you extract from your own company and instead employ your spouse or partner in your business. This will spread the income generated by the business more evenly between you both.
If you trade as a sole-trader you could take your spouse /partner into partnership, and again look to spread the income between you.
Where you and your spouse/partner already trade as a business partnership, consider changing the profit sharing ratios so you each receive a more even amount of profit.
If you are not domiciled in the UK you can adjust the amount of income you remit to the UK.
If you are married and living with your spouse, you can transfer assets to your spouse that generate income such as shares, savings or let property. Transferring assets between individuals who are not married may well create a tax charge.

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.

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.