Managing Income

buswaps

I have been thinking for some time that think I could/should be more legally creative in the way I manage my non PAYE income (I am employed and have a salary but also earn additional income from self-employed work). I know some people form limited or shell companies to do this so they can pay less tax (legally).
My wife earns a little over 5K per year (and yet we still lose our child benefit...grrrrrrrr!!) so there must be an angle to exploit (perhaps by me paying her an income on which she would not have to pay any tax)? Do I have to be a company to do that or can I do it as self-employed?

I pay tax at 40% on any additional income - would it benefit me to form a company and is this easy?!

Many thanks

Pennywise

Whether you're a limited company or sole trader, you can pay your wife the going rate for the amount of hours she works for you. If she doesn't work for you, then you can't legally pay here anything.

A limited company could work as long as you leave the money in the company - if you pay it out as wages or dividends, you'd still end up paying higher rate tax on it.

Limited companies are VERY cheap & easy to set up, but difficult to deal with the filing requirements such as annual accounts in accordance with accounting standards and filed as xbrl files - also you'd need to understand corporation tax instead of income tax. Loads of threads on here and other fora from people who've found themselves facing fines of hundreds/thousands of pounds when they've missed filing deadlines due to them not understanding the ongoing legal requirements. I'd strongly suggest you'd need an accountant which of course will set you back a few hundred per year.

richbeth

Hi,
there is an alternative, depending on how much over the HRT tax band you are it may be possible to use pension contributions to bring down your income allowing you to keep your CA.
R

nd85_2

This year I formed a Partnership with my missus. She helps with my extra-curricular work (mostly admin) so we decided to share profits 50:50. She's a lower rate payer so rather than paying 42% tax on all profit (income tax+ NI), its 42% on half and 29% on the other half. I filled in the paperwork myself and intend to do our self assessments myself too. Has been a great learning experience and is set to save us a few hundred quid this year.

chrismac1

In the short term - i.e. 2012/13 tax year - a SIPP or other pension contribution is your best option probably to retain some or all of your child benefit. I have various clients who have done this having weighed up the pros (keep child benefit) and cons (money tied up in SIPP until you are 55).

For 2013-14 the limited company option looks good to me. You can have Ordinary shares and your wife can have A Ordinary shares, which by a strange coincidence will be the ones which like to pay dividends. This needs to be robustly set up to avoid what is called an "income shifting" challenge by HMRC, Google this for more details and in particular the Jones (Arctic Systems) case.

Doubtless some of the HMRC punters on this site will not be happy about this advice, fine. You are exchanging a crystallised tax bill for a small risk - less than 20% in my view on the basis of your post - of a challenge to the actions you've taken to rid yourself of that bill.

zygurat789

nd85 wrote: »

This year I formed a Partnership with my missus. She helps with my extra-curricular work (mostly admin) so we decided to share profits 50:50. She's a lower rate payer so rather than paying 42% tax on all profit (income tax+ NI), its 42% on half and 29% on the other half. I filled in the paperwork myself and intend to do our self assessments myself too. Has been a great learning experience and is set to save us a few hundred quid this year.

Why not split profits 90:10 in her favour and save even more?