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 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.

Are you paying casual workers this summer? Perhaps you are paying piece-rates for the amount of produce picked or packed by each person. Reporting such small and variable payments under the new RTI system is a significant hassle.

The RTI rules require you to report each payment to workers, including paying casual workers, on or before the date of the payment. Fortunately you may be able to use one of these two concessions to ease your RTI reporting burden:

a) Where you are  paying casual workers daily or more than once a week, but the amounts paid are less than £109 per person per week, you can send RTI reports to HMRC weekly; or

b) Where the total number of your employees, including casual workers, is less than 50, you can send your RTI reports to HMRC on a monthly basis.

Concession b) will only apply for payments to employees made before 6 April 2014.

Your casual workers are likely to have no set working hours for each week. In effect they will be on a zero hours contract; paid for the hours they work, but otherwise not at all. In such cases you should choose option D of hours worked on the FPS report under RTI.

The Government wants employers to report data on the hours worked by employees in order to prevent fraud in the Tax Credits system. Under Universal Credit the hours worked will not be relevant to the employee’s claim, so in time when all claimants are moved from Tax Credits to Universal Credit, the requirement to report hours worked should be dropped.

We can do your payroll for you so you can let us worry about when to submit RTI reports when paying casual workers. Get an instant quote for our payroll services using the button below.

Newsletter issue – August 2013. Sign up now for your copy and receive free tax saving reports.