W41

Mac Kotecha & Co.

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London N3 2JP

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W41/T67- Should you pay your Spouse more than £5435, even if this creates a tax and NIC liability*?

(BASED ON NEW 08/09 RATES)

For 2005/2006 rates. click here

For 2006/2007 Rates click here


Option	Annual Spouse Pay	Cost on increase from £5435. (NIC'EE +NIC'ER + TAX)	Cost (%)	Total Saving**	Total Saving on increase from £5435	Total Saving (%)
A	5435	0	0	2228.35	0	41
B	6035	142.8	2.37	2363.04	134.69	39.16
C	15000	4069.47	27.13	2582.5	354.15	17.22
D	18000	5383.47	29.91	2655.94	427.59	14.76
E	22000	7135.47	32.43	2753.86	525.51	12.52
F	26000	8887.47	34.18	2851.78	623.43	10.97
G	30000	10639.47	35.46	2949.7	721.35	9.83
H	35000	12829.47	36.66	3072.1	843.75	8.78
I	42000	15932.47	37.93	3206.46	978.11	7.63
J	50000	20236.47	40.47	2602.3	373.95	5.20

(*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)

Annual Salary	Spouse Tax	Spouse NI	Employer NI	Tax saved	Total Cost	Tax Saving
5435	0	0	0	0	0	41
6035	0	66	76.8	134.69	142.8	39.16
15000	1793	1052.15	1224.32	354.15	4069.47	17.22
18000	2393	1382.15	1608.32	427.59	5383.47	14.76
22000	3193	1822.15	2120.32	525.51	7135.47	12.52
26000	3993	2262.15	2632.32	623.43	8887.47	10.97
30000	4793	2702.15	3144.32	721.35	10639.47	9.83
35000	5793	3252.15	3784.32	843.75	12829.47	8.78
42000	7426	3826.15	4680.32	978.11	15932.47	7.63
50000	10626	3906.15	5704.32	373.95	20236.47	5.20

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

Option g Savings from paying spouse £30,000 per annum)

Costs

Step 1 Employee tax

30,000- 6035 (personal allowance) = 23965. This will be taxed at 20% giving total tax of 4793.

Step 2 Employee NI

30000- 5435 (NI free pay) = 24565. This at 11% is 2702.15.

Step 3 Employer NI

30000 - 5435 (NI free pay)= 24565. This at 12.8% is 3144.32.

This gives a total cost of £10639.47. (£4793 + £2702.15 + £3144.32)

(Note: extra NIC of 1% only applies over £40040).

Savings

The salary is tax allowable (30000 at 41%) giving tax relief of £12300.

The Employers NI is tax allowable (3144.32 (from step 3) at 41%) giving tax relief of £1289.17

This gives total tax relief of £13589.17, which after deducting the additional costs of £10639.47 (from step 3), gives a net saving of £2949.70

From this, you deduct the savings from paying a salary of £5435 pa. This at 41% gives 2228.35 and you are left with £721.35 (£2949.70 - £2228.35), this being the saving on increase from £5435p.a to £30000 p.a)

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 23/06/2010

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