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Year End Tax Review 2004

Pay rise for the other half

Where one spouse employs the other, it is necessary to be able to justify the level of income paid - if the salary appears to be too generous for the duties involved, the Inland Revenue will not allow it to be an effective transfer for tax purposes. Now, however, the National Minimum Wage rules may apply to require a minimum amount to be paid - unincorporated family businesses are exempt in respect of family members living at home, but family companies may be affected. The Inland Revenue are responsible for the National Minimum Wage as well as for PAYE on salaries, and they may even argue that more should be paid out.

Traditionally, many people have paid their spouse a little less than the lower threshold for National Insurance Contributions, to avoid the significant contribution that was required when you crossed that line. The rules changed a few years ago, so that there are no NICs to pay on up to £89 per week (the weekly equivalent of the income tax personal allowance), even if you go over that limit, but benefits will be earned on pay above £77.

You can therefore earn benefits and save tax on a salary of £89pw to a spouse, without having to pay any NIC at all. A higher salary - say £95 - will still save tax for the payer, but will only carry a NIC liability on the £6 by which it exceeds the threshold. The "downside" is that pay which earns benefits (ie is bigger than £77pw) has to be reported to the Inland Revenue under the PAYE system (so that the entitlement can be recorded), so there is paperwork to complete even if there is no charge.