In this tax saving tip I will be looking at employing members of your family.
It is not generally known that every single person in the UK is entitled to an annual tax free allowance of £6,035 regardless of age or income. The tax saving tip today focuses on ensuring that you utilize fully this tax free band for all the members of your family – where possible. Once again, this is one of those use it or lose it allowances.
Quite often, a spouse is a key factor in the success of a small business but they are not always recognized as such for tax purposes. You are legally entitled to employ your spouse and pay them at least the statutory minimum wage, £5.73/hour currently, for all the work they do for your business. This could be answering the telephone, dealing with mail, organizing your diary, ordering materials – any number of valuable jobs that will ensure the smooth running of your business.
You will need to have a formal contract of employment setting out working hours and duties but that’s it. As long as this is formally documented (and this is where most small businesses fall down), and you actually pay the salary each week or month, you will have the full deduction of the salary against your business profits and your spouse pays no tax up to the £6,035 limit.
Obviously things are a little different if your spouse already has a job and uses their tax free allowance – article this is aimed at unpaid spouses, or those whose part-time earnings do not fully utilize the allowance.
I will now go a little against convention here. I know it is unfashionable to think about pensions and “when we get to 65” but I believe you should pay your spouse a little more than the tax free minimum each year, so that they actually pay some National Insurance.
There is a very good reason for this and it is to do with the state pension. In order to qualify for a full, independent state pension, you have to accrue 39 qualifying years of National Insurance contributions. In order for a year to be a qualifying year, you must have made some National Insurance contributions.
So my advice is, as long as you can justify the salary for the amount of work they do, pay your spouse around £7,000 per annum. Yes, they will pay a little tax and NI, but all of it will be deductible against your business profits, but each year you do this for will be a qualifying year for pension purposes.
It is cheaper to do this than to find out when you get to 65 that you have too many gap years and have to pay several £’000 to make up the missing contributions and not get any tax relief for them against your business profits.
This applies not just to your spouse, but to your children as well. Any child from 13 upwards can be employed by your business and earn money tax free to them and tax deductible against your profits. Just make sure you adhere to the employment regulations and don’t overwork them!
If you would like to discuss this tip in more detail, please do not hesitate to ring me on 0800 047 0731 anytime. I look forward to hearing from you.