Can I save taxes by paying my wife through my limited company?

Limited companies can write off their business expenses against their business income for tax purposes.  The term the legislation uses is expenditure incurred “wholly and exclusively for the purposes of the trade”.  This is the test.  So the answer to the above question is yes.  And no.

Let’s start with the ‘No’ part. It is not enough simply to pay your wife or partner through the company if they do nothing for the company.  Any such expenditure would not be for the purpose of — or of benefit to — the trade.  On the other hand, if they were, say, to deal with the company’s paperwork (filing, shredding, photocopying), send relevant emails, make or receive work-related phone calls on your behalf, liaise with your accountants and tax advisors, and the like, then ‘Yes’, there is potentially a significant tax advantage in paying them to do so.

The tax advantage arises from the fact that wages for any employee (regardless of whether they are a family member) decreases the company’s taxable profits thereby reducing the tax liability or increasing the tax repayment. Your overall family net income has also increased because the money paid to your wife or partner is tax free in their hands (provided their overall income is below the relevant tax threshold of £12,570 for 2021/22).

You must pay at least the national minimum wage which, for the tax year 2021/22, is £8.91 per hour for those aged over 22. There is no maximum rate of pay but you must be sensible; the rule is that the rate must be fair and proportionate for their job role. In addition to their wage you will also need to pay national insurance if they earn at least £166 per week. Prudent planning obviously maximises your tax benefits.

To expand the opening question a little, the same general rules apply if you were to employ your son or daughter to work for your company, though if they are young you need to ensure that you are adhering to UK employment law. If your child is at least 16 they are entitled to the national minimum wage (under 18 £4.62; 18 to 20 £6.56 and 20 to 22 £8.36).  For any children under the age of 16 you should follow the general rule that their pay should be reasonable for the work they are carrying out.

In order to get maximum benefit from paying your wife or partner or children through the company, you must structure the arrangement properly.  At Maximoor we ensure the company’s payroll system is properly set up and efficiently managed.  We advise on most appropriate sums for wages, taking into account other employments and benefit entitlements. We will also draft simple and flexible employment contracts and relevant company minutes.  Efficient tax planning at the outset is the best for the whole family: Dad, Mum, Son and Daughter.