Get by with a little help from your (tax-efficient) friends. Your company is establishing itself meaning that you are working very long hours. As the business can’t afford to pay for more workers, to relieve some of the burden can you pay your spouse out of your income and claim a corresponding tax deduction?
Company expense
The cost of employing staff is a legitimate business expense and therefore tax deductible from profits. However, there might be situations when it’s not viable for your company to employ as many people as it would like or needs. For example, during a start-up period when you need to keep costs down. It’s in this type of situation where directors’ spouses or partners might be roped in to lend a hand on an unpaid or expenses only basis.
Tax relief for partners’ expenses
While HMRC is suspicious of expenses paid to or for a spouse or partner, it will allow them where there’s a genuine business motive. For example, where your company pays for you to take your partner to a weekend business conference where they help host events. HMRC takes an even more cautious approach to expenses you personally incur, but again will allow them where there’s a clear business motive.
Example. Bill is a director of Acom. He asks his wife Ann to take a taxi and act as courier to deliver an important package to a customer. Ann spends a couple of hours in a taxi, which costs her £200. She also spends £5 on some refreshments while waiting to make her return trip. Bill reimburses Ann out of his own pocket. HMRC will allow him a tax deduction for the £205.
Paying for lost time
Bearing in mind that Bill’s partner spent a few hours of her time on Bill’s company’s business, if he paid her for this and claimed a tax deduction for it, how would HMRC respond? The answer is that there’s nothing in the legislation that prevents this. What’s more, its own guidance manuals acknowledge that a deduction can be claimed.
Tip. If you rely on someone to help you with your work on a regular basis, say a spouse or partner, you can pay them a regular salary to compensate them for their time and obtain tax relief for it. You must pay them a separate and identifiable wage, it can’t just be part of, say, housekeeping costs.
HMRC’s own rules
HMRC imposes a special condition for granting a tax deduction, although there’s no reason in law for this. It says that paying someone as your assistant is only tax deductible if you’re required to do so under the terms of your employment. You should therefore ensure your employment contract includes a suitable clause. As a director that shouldn’t be difficult to arrange.
Tip. Keep the amount you pay realistic for the type and amount of work your partner does. There’s no reason why you can’t have a zero-hour agreement with them so you can vary their work from week to week, according to what’s needed.
Tax savings. As a higher rate taxpayer paying your partner, say, £5,000 per year, could save tax of up to £2,000 (£5,000 x 40%). Unlike other business expenses the money doesn’t have to leave the household, it’s simply a matter of re-allocating it.