T18/T50/W4 - Should you pay your Spouse more than £400 p.m, even if this creates a tax and NIC liability*? (BASED ON 2005/2006 RATES)

(*Figures assume spouse has no other taxable pay)

(**Tax relief calculated from the employer's viewpoint at 41% assuming employer will be a higher rates taxpayer.)

Of course, in order to satisfy the Inland revenue, you must ensure that you do not pay your spouse more than the commercial rate for the work he/she does.

Please see Schedule A for breakdown of column 4.

Please see Schedule B for a full explanation of how the figures have been calculated for illustrative example (g) (in yellow).

Schedule A - Breakdown of column 4 (Cost of spouse payments)

Schedule B - Explanation of how figures have been calculated for illustrative example (g).

Option g Savings from paying spouse £1,600pm (19200 per annum)

Costs

Step 1 Employee tax

19200 - 4895 (personal allowance) = 14305. Of this 2090 will be taxed at 10% (£209) and the remaining 12215 at 22% (£2687.30) giving total tax of 2896.30.

Step 2 Employee NI

19200 - 4895 (NI free pay) = 14305. This at 11% is 1573.55.

Step 3 Employer NI

19200 - 4895 (NI free pay)= 14305. This at 12.8% is 1831.04.

This gives a total cost of  £6300.89. (£2896.30 + £1573.55 + £1831.04)

(Note: extra NIC of 1% only applies over £31720).

Savings

The salary is tax allowable (19200 at 41%) giving tax relief of £7872.

The Employers NI is tax allowable (1831.04 (from step 3) at 41%) giving tax relief of £750.73

This gives total tax relief of £8622.73, which after deducting the additional costs of £6300.89 (from step 4), gives a net saving of £2321.84

From this, you deduct the savings from paying a salary of £400 p.m. This at 41% gives 1968 and you are left with £353.84 (£2321.84 - £1968), this being the saving on increase from £400 p.m to £1600 p.m)

Other Points to Consider

Although PAYE liability is payable earlier, a higher rate of pay may not only be regarded as more realistic, but will also make it possible to make higher payments into am Employer Pension Scheme.

The Employee will also benefit from Sickness and Maternity pay and state pension. (basic + Earnings related).

Married higher rate tax payers employing a spouse should consider this.

For further discussion, please speak to Mac Kotecha.

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This web-site was last updated on 13/06/2008

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