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.

Child Benefit And Child Tax Credits After 16

If you have a child aged 16, check whether you are still receiving all the child benefit and child tax credits you expect to.

Child benefit and child tax credit both stop automatically on 31st August on or after the child’s 16th birthday, but where the child is in approved education or training, the parent who claims the child benefit is entitled to extend that claim until the child reaches their 20th birthday. ‘Approved education’ means at least 12 hours of supervised study per week, and the training can include an apprenticeship.

From September 2013 children who live in England (the rules are different in Wales, Northern Ireland and Scotland) are required by law to remain in education or training until the end of the academic year in which they turn 17. So there are a lot of families out there with 16 years olds who are in approved education, but who have lost their child benefit.

If you are one of those parents, and you want to continue to receive the child benefit, you need to contact the Child Benefit office at HMRC, to inform them that your child is still in approved education or training.

Similar rules apply for child tax credit. In that case the claimant must contact the Tax Credit office.

Although child benefit and child tax credit are both administered by HMRC, you need to inform them twice, as one section of HMRC cannot pass the relevant information to another part!

High income child benefit charge

You may prefer not to receive the child benefit if you or your partner/spouse earns £50,000 or more. In that case all or part of the child benefit paid to your family is clawed-back through the operation of the high income child benefit charge (HICBC). HMRC has written to some of the parents who may be due to pay the HICBC, but not all, as they cannot correctly identify every person who may be liable to pay the charge. More details here: high income child benefit tax charge.

If you are the highest earner in a family that has claimed child benefit since 7 January 2013, and your total income is £50,000 or more, you need to declare that child benefit on your tax return form. If you don’t normally complete a self-assessment tax return form, you need to ask HMRC to set you up on the self-assessment tax return system. We can help you with that, but don’t delay, as if you fail to complete the tax return form on time there will be automatic penalties to pay.

Disclaimer

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.