Employing wife to reduce tax bill

smit247

Hi there

So my tax situation is a little complex, but I'll do my best to explain the situation.

I'm currently both employed, and also have a secondary income as a sole trader as a freelance designer.

My employment brings in £40k per year, and my freelance profits around £20k this year, I also have a small income from a rental property of around £2k.

My question is can I employ my wife to reduce my tax bill? She is self employed as a property manager, bringing in roughly £11k a year herself for admin work.

What would be better... employing her, or her invoicing me as a freelance administrator?

Also am I better remaining a sole trader, or should I look to become a limited company?

Thanks in advance!

Comms69

smit247 wrote: »

Hi there

So my tax situation is a little complex, but I'll do my best to explain the situation.

I'm currently both employed, and also have a secondary income as a sole trader as a freelance designer.

My employment brings in £40k per year, and my freelance profits around £20k this year, I also have a small income from a rental property of around £2k. - Income or profit? 2k is very very small for a rental property income

My question is can I employ my wife to reduce my tax bill? She is self employed as a property manager, bringing in roughly £11k a year herself for admin work. - You would increase her tax bill though?

What would be better... employing her, or her invoicing me as a freelance administrator? - I wouldn't do either. Employ her and you must have a pension, paid holiday etc. Claim she is freelance, when she isn't, and HMRC will come down on you

Also am I better remaining a sole trader, or should I look to become a limited company?

Thanks in advance!

Too small for a ltd company.


Personally I would just pay the tax I'm due to pay, but that's just me.

Darksparkle

Employ her to reduce your tax bill or employ her to actually work for you?

NYM

I'm curious, but would that minuscule £2K profit from your rental property be because you've paid your wife £11K to manage it -or- does she manage other unconnected property?

Alice_Holt

What does your accountant advise?

If it's your intention to employ her to reduce your tax bill, do your sums very carefully (employers NI, auto enrolment pension, etc) as she will be a taxpayer too.

I'd be looking at making additional pension contributions, your scheme seems overly complex and subject to challenge by HMRC.

Pennywise

Re the £2k rental income - is that net after mortgage interest? The new rules being transitioned in could be painful to you if it is.

Re ltd co evaluation, do you actually need to draw the £20k profit or could you either leave it in the proposed company for the long term, or pay it into pensions instead?

Re the sole trader versus Ltd co, do you use your car for your self employment much?

Not quite as simple as a yes/no answer as to whether a ltd co would be beneficial without knowing a lot more about your circumstances.

smit247

In answer to some of the questions to the above

The 2k rental income, is rental profit after management fees and rental costs (the property is shared ownership adding to the confusion!). My wife manages other properties, not this which is managed by a letting agency. It may actually be more like 3-4k going forwards, after required repair work and tenancy fulfilment costs in the past 12 months.

So I would be employing her to work for me - I genuinely need administration help with invoicing and chasing payments. I'm aware this would be increasing her tax bill, but she is in the 20% tax bracket and I'll be in the 40% bracket. This figure does not include mortgage interest deductions.

So I'm not trying to cheat the system, more economise the tax bill of our household. I could feasibly justify employing her on a freelance ad hoc basis or on more of a retainer basis to spend a couple of days a month on administration for me.

Pension contributions could also be an option - or leaving it in the company, although how would this work if it is subsequently drawn out say next year? Guessing that gives me a bigger 40% tax headache?

Due to have a conversation with my accountant post Jan 31

smit247

Comms69 wrote: »

Too small for a ltd company.


Personally I would just pay the tax I'm due to pay, but that's just me.

But would you not consider a cost effective way to enhance the business efficiency and reduce the tax bill in the process?

That's fine if you wouldn't... but if I can make my life easier by employing someone to help with an aspect of the business I'm not great at, and reduce our collective tax bill in the process then I'm all for it.

Why would my situation mean I'm too small to become a limited company - are you getting confused with VAT registration?

smit247

Pennywise wrote: »

Re the £2k rental income - is that net after mortgage interest? The new rules being transitioned in could be painful to you if it is.

Re ltd co evaluation, do you actually need to draw the £20k profit or could you either leave it in the proposed company for the long term, or pay it into pensions instead?

Re the sole trader versus Ltd co, do you use your car for your self employment much?

Not quite as simple as a yes/no answer as to whether a ltd co would be beneficial without knowing a lot more about your circumstances.

What exactly are the new rules coming in?

I do use my car for self employment purposes - I'd say around 60:40 personal & commuting (to 9-5 place of work) vs self employment

I figured it wouldn't be as simple as yes / no - especially with my freelance income not being guaranteed to be at the same sustained level in years to come. I think in years gone by becoming limited would be a no-brainer in order to take profits as dividends, but the gap is closing on how much of a financial advantage this gives you.

Dazed_and_confused

What exactly are the new rules coming in?

They started back in April 2017 so apply to your next tax return, for 2017:18.

There is more info on gov.uk (Google landlord residential loan interest relief) but in simple terms you will no longer be able to claim loan interest as an expense. There is a transitional period so this year you can claim 75% of the loan interest, next year 50% etc until nothing can be claimed.

As compensation you will be able to claim a tax credit linked to the amount of loan interest you cannot claim as an expense. But this will be limited to 20% not whatever your top tax rate is so some will pay more

And you would of course have more taxable income in the first place so it could impact personal allowance (income over £100k), High Income Child Benefit charge or Married Couples Allowance.