If business is booming and you need an extra pair of hands, you may be considering employing your spouse or partner in your limited company. Or perhaps working together would simply make it easier to manage your work-life balance and family commitments.
Whatever your motivation, there are certain tax implications you should know about, which we explain in this post.
Can I employ my spouse or partner?
The family business sector is a core part of the UK economy. According to Oxford Economics, there were an estimated 4.8 million family businesses in the UK in 2020, which equates to 85.9% of all private sector firms.
There are countless benefits to going into business with family, and there are no laws preventing you from employing your spouse or partner. However, the work that you pay them for must be ‘wholly and exclusively’ for the business.
In most cases, any relatives who work for you are entitled to at least the National Minimum Wage, but there are exceptions if they also live in the family home. Their wages should also be fair and proportionate for the work that they do, so you must be able to justify their rate of remuneration.
HMRC’s general view is that you should not pay family members more than you would anyone else for doing the same job in your business. For example, paying your spouse or partner £60 an hour for basic administrative work would be considered excessive.
You must also pay family members in the same way as any other employee. This means that you will have to process their wages through payroll, make any required deductions of Income Tax and National Insurance contributions (NIC), and pay employer’s NIC, where applicable.
What are the tax benefits?
There are countless reasons why business owners choose to employ their spouse or partner, but tax efficiency is one of the most common. Whether operating as a limited company, sole trader, or some form of business partnership, hiring your other half can be one of the most efficient ways to utilise personal tax allowances and reduce your business tax liability.
Utilising lower tax rates
If your spouse or partner is not making full use of their tax-free Personal Allowance (£12,570 for 2023/24 tax year), or if they are in a lower tax bracket than you, employing them in your business would enable your household to benefit from more tax-free income and/or lower Income Tax rates.
Perhaps they could relieve some of the business burden, by taking on certain tasks that you are normally responsible for. Depending on their skills and what your company actually does, this may include answering calls, general administration, bookkeeping and accounting, marketing, and PR, or anything else with which you require help.
By employing your other half and delegating some of the workload to them, you could legitimately divert income that you would ordinarily pay to yourself, provided that it is a reasonable and justifiable sum for the work that they do.
This would allow you to reduce your own personal tax burden whilst making the most of their unused allowance or lower tax rate, thus increasing your combined household income. From a tax perspective, it makes more sense than employing an external candidate or outsourcing the work to a service provider.
Reducing business tax
When you hire anyone to work for your business, their wages are a tax deductible expense against business profits. Therefore, if you employ your spouse or partner, the money that you pay them will reduce your taxable business profits and Corporation Tax bill.
Additionally, if you are currently the sole director and employee in your company, you may be able to claim Employment Allowance when you bring in your other half. This would allow you to reduce your annual employer’s National Insurance liability by up to £5,000 (2023/24 tax year).
Making your spouse or partner a shareholder in your company
In addition to (or instead of) employing your spouse or partner, you could make them a shareholder in your company by issuing or transferring shares to them.
Making them an employee and a shareholder would be the most tax-efficient option, because you could structure their remuneration as a mixture or wages and dividends.
All shareholders have a tax-free dividend allowance of £1,000 (2023/24), with additional dividend payments attracting lower tax rates than salaries and wages. Moreover, dividends are not subject to National Insurance contributions.
By taking this approach, you could utilise their unused Personal Allowance and lower Income Tax band, claim their wages as a tax-deductible expense against business profits, qualify for Employment Allowance, and distribute some of your company profits to them as dividend payments.
Employing your husband, wife, or civil partner is an effective way to reduce your household tax burden, as well as the amount of tax that your company has to pay.
There are certain rules, which we have touched on briefly, and it requires careful planning. However, if managed correctly with expert guidance from an accountant, you could enjoy considerable tax savings.
Should you have any questions about this post, please leave a comment below. Our company formation team is also available to provide help and advice on other matters related to setting up and running a limited company.