As a Sole Trader - Can I Pay ‘Wages’ to My Spouse to Save on Tax? - #AskAMS

The latest edition of our Ask the Experts: Financial. We spoke to AMS Accountancy regarding the right way to pay your husband or wife a wage through your company as a sole trader.

Many business owners pay their spouse a salary – typically up to the Personal Allowance limit (£11,000 in 2016/17).  If the spouse has no other taxable income, they will not pay tax on their salary – and the business owner saves tax at 20% or 40% on the salary paid.  e.g. a salary of £7,000 to the spouse could save £1,400 tax overall (plus National Insurance at 9% (for sole-traders) or Dividend tax at 7.5% (for Limited Companies).

But, if the salary is not actually “earned”, then the tax relief can be disallowed by HMRC for not being genuine. The wages must be appropriate for the contribution made to the business.  For example, if your wife only works in the business 5 hours per week, then the level of pay should reflect this.

The wages should also be physically paid as they are earned, and, be in line with a payroll supported by a contract of employment, or an offer letter.