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How to avoid trouble and strife when employing your spouse

With the recent media interest in employing spouses, how can you employ your ‘other half’ and avoid any trouble and strife?

It is quite common to employ a spouse in a business and pay them up to £4615 a year, tax free. However, the Inland Revenue may take an interest in this payment if it is not commensurate with the duties they perform, so care does need to be taken.

If your spouse is paid between £4004 and £4615 there will be no National Insurance contributions to pay. However they will be credited with contributions for that period which will count towards a pension and other state benefits. You will need to ensure that a P60 is completed and that your spouse is included on the annual PAYE return.

Consideration needs to be given to the National Minimum Wage legislation as you must pay your spouse at least £4.50 per hour (£3.80 per hour for a spouse aged 18 – 21)

Instead of paying your spouse you may consider bringing them in as a partner. Providing the necessary formalities are dealt with and they work in the partnership, they can also share in the profits. This may be of particular benefit where the business profits are taxed at the higher rates.

If you are thinking of establishing a limited company, it is often beneficial for both spouses to contribute separately to the share capital.

This may help avoid a challenge from the Inland Revenue on future dividend payments. Although it is possible to transfer shares between spouses at a later date, the Revenue may look closely at such arrangements, especially if the company’s main source of income is derived from one spouse.