Considerations when employing a director’s spouse

Tax benefits

If the director’s spouse or partner has no other salary or earns less than £12,570 per annum, then it would be advantageous to pay them a salary as the spouse will be able to use up all their personal allowance and the company would save corporation tax (CT) at up to 26.5% (if its profits fall in the marginal rate band).

Example. Let’s say the director’s spouse has no other income so becomes an employee of the company and receives a salary of £20,000. For 2023/24, the company would need to pay employers’ NI on the salary of £1,504 but as it pays company tax at 25%, it would save CT of £5,376 (£20,000 plus £1,504 x 25%). A net saving of £3,872. The spouse will have to pay income tax of £1,486 and employees’ NI of £743 but that’s still an overall tax saving of £1,643.

A salary of up to £9,100 a year would mean there was no tax or NI to pay for the spouse or the company. At this level, while not having to pay NI, the spouse would still get NI credits towards the state pension.

There’s normally little benefit in paying the director’s spouse a salary if they’re already earning above the higher rate tax level (£50,270 for 2023/24) elsewhere. While the company would save the corporation tax on the salary cost, the spouse would pay 40% income tax on their salary (or even a marginal rate of 60% if their income is between £100,000 and £125,140).

Will they be doing any work?

If HMRC spots that the director’s spouse has been added to the payroll it’s quite likely to take a closer look and possibly ask questions about what their role in the business is. It can’t stop the company from paying the director’s spouse, but it can refuse to allow the corresponding corporation tax deduction for as much of the spouse’s salary as it believes is not justified by the work they do for the company.

There’s another potential problem. As well as not allowing a CT deduction, HMRC could argue that because the spouse does nothing in the business in return for their pay, their salary actually belongs to the director and, therefore, is taxable on the director.

If a director wants to employee their spouse, they need to ensure that the spouse does some actual work for the company to justify their level of pay. You should make sure that there is a job description setting out what the spouse does for the business. They should also have a formal employment contract and be set up with a company email address like any other employee.

The spouse should be paid a commercial rate for the work they do for the company. In other words, you should consider what the company would pay someone else for doing the same job.

Spouse becomes director

As explained, the spouse needs to have a genuine role to play in the business. However, there’s a way to achieve this even if the spouse doesn’t have the skills to be directly involved with your company’s trade.

Make the spouse a non-executive director (NED). While being a NED doesn’t necessarily involve much work it justifies a salary as it involves taking on the legal responsibilities of a director. For example, attending directors’ meetings and providing ad hoc advice on management issues. Being a NED should justify to HMRC a salary of least a few thousand pounds per year and so validate the tax savings that go with that.