How much should I pay my spouse if I (sole trader) employ her?

[warlord4747]

I am a sole trader in Scotland, and for reasons I won't bore you with, I have to remain a sole trader (I cannot incorporate/become a partnership etc).

For tax year 2022-2023, my pre-tax profit was £169k.

I'd like to employ my spouse, for maximum tax efficiency. Is there any benefit to paying her (e.g.) £50,000 p/a, rather than just the personal allowance?

Thanks.

 

[willdes1]

@warlord4747 Not sure why others are saying a sole trader cannot have employees. They can. The only real caveat is that *you* cannot be employed, whereas if you had a Ltd Co then that entity can employ its directors

You will need to manage payroll and make sure anything employment related is legal and above board. High street accountancy practices can manage that for you for not much extra, and given your turnover, I assume you are already taking accountancy advice.

Why can you not incorporate? On the face of it that is the best solution here...

https://www.theaccountancy.co.uk/soletrader/can-you-employ-people-as-a-sole-trader-13871.html

 

[danny3284]

@willdes1 If OP was a pilot working on a self employed contract for an airline, would they be able to incorporate? I believe this might be one of the situations where you’d only be allowed to be a sole trader. The numbers also correlate.

 

[iphonetrabaohanh]

@danny3284 OP, considering his salary & username is probably a barrister

 

[har_habayit]

@iphonetrabaohanh Yeah i was going to say Barrister can't incorporate

 

[reader01]

@iphonetrabaohanh He said he's a criminal defence lawyer in previous comments. That would be why he can't do it.

 

[mamacosp]

@iphonetrabaohanh I'm not sure barristers earn that much...

 

[willdes1]

@danny3284

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No, because there are "badges of employment", that are grey-ish but still defined, which a pilot would certainly fall on the "employed" side of the fence.

https://www.gov.uk/government/collections/employed-or-self-employed

 

[seraphimscherub]

@warlord4747 It all depends on what you are paying her to do.

Is she the staff chef? Does she run the books?

As long as it's solely for work you can pay whatever you want and hmrc will just nod. Just be wary that if they want more info you have to back your case. So do homework and compare market rate and her duties.

But my advice is you need to do your homework and do the maths yourself as there isn't enough info you have given.

For example:

Does she have her own job?
Age?
Pension?

Without knowing the above we can't tell you what is most tax efficient. Get an accountant.

To throw a curve ball into the mix, you might want to make your quality of life better. Is best to rent a small office nearby? Do you need the latest laptop for work every year? The latest mobile phone? Do you need the best brand name tools? All of these can make a good dent into your trading income that can all be written off after a year or 3 as capital expenses.

 

[gracebwthme]

@seraphimscherub Agree this, I had a client challenged as he paid his wife suspiciously just under the 40% tax band, they asked what her duties where and when his response was she answers emails when I am out on site, they compared it with other roles and also with using a virtual pa service.

Of course the other part is that you will need to maintain PAYE records, pay Employers NI and also make pension contributions on top of her 'wages'.

As others have said an Accountant will be able to advise esp if you are banned from being a director

 

[warlord4747]

@gracebwthme Thanks - that’s helpful. Fortunately I’m not banned from being a director! Just to do with professional rules.

 

[gracebwthme]

@warlord4747 Interesting... i am an ACCA accountant and originally you couldn't incorporate so it was sole trade or partnership only. This was the same for ICAEW and ICAS, but the ACCA changed the rules years ago, so I went Limited

 

[warlord4747]

@seraphimscherub She can do a number of things - "office manager" is probably the best summary. She is not otherwise working at the moment. She's 30 and has otherwise been working for 7-8 years, so does have pensions.

I do have an accountant - they're just not the best at proactively giving advice...

 

[thelukewormchrist]

@warlord4747 Sounds like you need a new accountant.

 

[thankfulone]

@warlord4747 Hey so I'm in this situation with my wife (she's the Director, I'm a " business admin manager" (not the exact title but you get my drift)

What we did was set up a company pension (you'll have to now you have a member of staff by law) and increased the max contributions for the employees, I put the max I can each month into that for my pension that the company matches.

Pay wise I'm on 25k pro rata and "work 25 hours a week" so I take home around 1.6k a month, this means I pay into my NI pension pot, I haven't paid any tax this year so come the end of the tax year I'll get a commission payment to take me up to maximise my tax efficiency (I was unemployed for a while before "working" with my wife... I was actually working with her but wasn't being paid haha).

I then also pay into a vanguard SIPP each month.

In terms of YOUR most efficient way of getting money, have a look at the flowchart, it's numbers may be out of date, so check them, but it really helps visualise things.

 

[djames]

@warlord4747 Time for a change; your accountant should be all over this; up selling you payroll services, additional tax return services & planning advice.

Maybe you are a partnership now?

Please review your advisor.

Was Partner in public practice for 20 years.

 

[tirgithin]

@warlord4747 Accountants don't come cheap, replace that clown

 

[bridgetbride]

@warlord4747 You can pay her whatever you want. But for tax purposes you can only deduct costs wholly and exclusively incurred for business purposes. When there is a personal relationship, hmrc will normally allow what you'd pay someone you didn't have a personal relationship with but any excess would be disallowable as incurred for personal purposes (in other words you're only paying them the excess because of the personal relationship).

 

[somerandomperson]

@warlord4747 Do you uh, not have an accountant hired with numbers like these?

Otherwise make an LTD and make her a co-owner for efficient dividends. Also make an LTD pronto just because of the insane tax you must be paying now...

 

[warlord4747]

@somerandomperson I do have an accountant, don't worry.

I've said in the OP that I cannot set up a Ltd company. This is due to professional rules relative to what I do for a living.