DIRECTORS’ TAX - 23.05.2007

How much can you pay your spouse?

Who do you turn to?

Vital role. You are the mainstay of your business but your spouse or partner is likely to provide a good deal of support, so it’s only fair that he or she should be paid for that role. The wages paid will be a valid tax deduction for the business if the Taxman is happy that they’re paid at a commercial rate for the work performed. So how do you reach this magic figure?

Step 1. First assess exactly what your partner does for the business. Can the work be classified as book-keeping, telephone answering, marketing or negotiating contracts? Perhaps your partner is an IT whiz who maintains your website or database, or simply keeps your diary and provides other secretarial services?

Who to call? A freelance office assistant could perform all of these tasks, and many are prepared to work remotely using a broadband link to service your business. Ask at least three different providers to quote their hourly rates for the work required. Then discount this freelance rate by about 50% to take out the tax and risk elements.

Step 2. Next, calculate the average number of hours spent by your spouse per week or month on business activities. This can be tricky, but even a rough diary note made at the time is good evidence should the Taxman ever seek to challenge the amount paid.

Check that the gross wage you expect to pay to your spouse/partner is at least £5.35 per hour worked (since October 1, 2006), which is the National Minimum Wage (NMW) rate. Unincorporated businesses that pay family members who live at home do not have to worry about the NMW.

Step 3. Pay the wages due from the business bank account into your partner’s own bank or building society account, which ideally should be set up in his or her sole name, rather than jointly. For the company to be guaranteed a tax deduction, the wage must be actually paid rather than just made as an accounting adjustment in the books.

PAYE detail

Tax and NI-free. If the wage to be paid is over £87 per week for 2007/8, it should be recorded through a PAYE scheme so your spouse/partner can receive free National Insurance credits. No tax or NI is payable by your business until the weekly wage exceeds £100 (for 2007/8).

Tip 1. The NI credits cost you nothing but allow your spouse/partner to build up an entitlement to the State Pension.

Tip 2. As your spouse is an employee of your business you can also give them tax and NI-free childcare vouchers worth up to £55 per week. These childcare vouchers should be made available to all your employees who have children aged under 16 to care for. It doesn’t matter how few hours the employee works; he or she will be eligible to receive the tax-free childcare vouchers, even if they are also receiving similar vouchers from another unconnected employer.

Warning

If your spouse/partner has income from another job or business which covers their personal allowance (£5,225 for 2007/8) it may not be tax efficient to also pay them a wage from your business. It’s all about balancing the income.