For the self-employed it can be very convenient to pay their wives,
husbands or partners to do work that they would otherwise be forced to
pay someone else to do. They tend to be more flexible with their hours,
it is an easy way of managing your own time together and, of course, if
they are not working for another employer and are willing and able to
do the job then why pay someone else?
However, the taxman does not always see it that way. He often
suspects that spouse wages are just a way of claiming a taxable
expense when very little work has actually been done. He may need
convincing that it is a genuine expense.
On the other side of the coin, you have to watch the National Minimum
Wage regulations as it can be easy for the hours to mount up and what
might have once been intended as a notional wage for opening post,
taking phone calls, etc can suddenly fall below the NMW thresholds.
Firstly and most importantly, all members of the family receiving wages from your business must be recorded as employees unless it really was just a one-off payment of no more than £95 (this goes up each year in line with the NI lower earnings limit). If they are working for someone else already then they must sign a P46 and tick Box C. If they have had no other job in the current tax year they can tick Box A which is handy because then you can give them a cumulative tax code (see our information sheet on Starters & Leavers). If they are not EU citizens, you will also need to check that they have the right to work in the UK, otherwise you could end up with a £10,000 fine.
Secondly, it would be a good idea for them to keep a log of anything
they do, a bit like a timesheet, so there is a record of work carried out.
This should deflect any doubts as to whether the job exists, although
there may still be an argument about the amount of wages paid if they
were a lot higher than the going rate for that type of work. One way of
getting round this would be to make them Company Secretary. Even
though most companies do not require a Secretary now under the new
Companies Act (unless there is only one director) you can still choose
to appoint one (or more) if you wish, and as office holders you can pay
them a notional annual fee irrespective of work done.
So if your spouse or partner does not have another job or any other
source of income, employing them yourself on a part time basis would
be a good way of using up their annual personal allowance and saving
tax on money you might well have given them anyway, providing of
course that there is actually some work for them to do.
The only other point worth bearing in mind is that if they earn interest
from any source that would qualify for a tax rebate due to their total
income being less than their personal allowance plus the 10% rate
band for savings income (£8,915 for 2009/10) be careful not to lose
this by using up their 10% band with earned income. Otherwise you
may lose more money than you save!
