Employing your spouse as a sole trader

I am a self-employed designer earning about £50k after costs. My spouse does admin work for me in the evenings – she already has employment income of about £30k per year from her full time job – is it worth me paying her for the book-keeping work? How would I go about this?

 

UPDATE Sept 2023 – this article is now out of date, please refer to our home page for more info.

 

 

 

As you are probably aware, currently (for the 2015/16 tax year) the portion of your income that falls above £42,385 is being taxed at the higher 40% rate.

Conversely your wife, earning a salary of £30k, has over £12,000 of the basic rate (20%) tax band that is currently unused and potentially available to reduce the overall tax charge for you as a couple.

This assumes she has no other income.

There are a couple of ways in this scenario to pay your spouse for the book-keeping work and therefore reduce your taxable income to keep you outside of the higher rates of tax without trading as a limited company.

We will look at examples below where you will pay your partner £7,615 (just enough to remove income at the higher rates of tax):

Can I employ my spouse?

If you were to go down the route of employing your spouse you would need to set up a PAYE scheme with HMRC and run a payroll, as this would be your wife’s second employment and she is liable to national insurance.

We would also recommend having an employment contract in place for her ensuring you do not fall foul of minimum wage legislation.

The issue you would have with a payroll is that you would need to deduct employees’ national insurance from your wife’s salary before paying her. Currently employees’ national insurance on earnings between £8,060 and £42,380 stands at 12%.

We will ignore employers’ national insurance as we assume you have no other employees and as such any lability will be covered by the employment allowance.

As such the £7,615 wage would save personal tax of £3,046 and national insurance £152.30.

However, this would attract tax on your wife’s salary of £1,523 and national insurance of £913.80.

This would give a net total saving of £761.50.

Self Employed Partnership

Your wife could become a partner in your business – as there would be more than one person in the business your business would cease to be known as a Sole Trader and would be known as a Partnership.

You would need to register your partnership with HMRC, see here.

As a partnership you would have the extra admin of a partnership tax return and also a further tax return for your wife (assuming one is not already required).

The benefit of a partnership is you would be able to adjust the level of profit share in future years so as to be as tax-efficient as possible; this can be of major benefit to married couples.

If you were to split the profits so as £7,615 was paid to your wife, as above, the personal tax and national insurance saving to you would be £3,046 + £152.30.

The extra tax payable on your wife’s profit share would be £1,523. There would also be a class 2 national insurance liability of £2.80 per week (£145.60 annually).

There would be no class 4 national insurance payable as the share of the profits would fall below the threshold of £8,060.

In this instance the net total saving is £1,529.40.

Summary

It would appear on balance that a partnership structure may be the most appropriate and tax efficient for your circumstances but we would strongly advise that you discuss this with an accountant.