Paying my wife some of our business income

premiumz

Hi all,

My wife and I run our own business (sole trader) from home. It's been mainly me doing it for the majority of the years and so I would pay the money from the business account to my personal account and then transfer money to our joint account to keep things simple.
The past couple of years my wife has been working on the business with me but I didn't bother changing how payments were done as it was simple and we continued doing what we were used to.
It's come to my attention when doing my accounts for 2019-2020 that had I also paid her directly each month it would have lowered our tax. Also, because I didn't realize that once you hit 125k you are no longer entitled to your personal tax allowance. I think it's for every £2 over 125k they take £1 off? (so after 150k?)
So we got hit big time from just not paying into her account and my own account to split the earnings between both of us. We would have both been entitled to personal tax allowance and we would have paid less tax overall. I messed up big time on that one as I didn't know about it. It's done now for 2019-2020. But I really don't want that to happen again for 2020-2021.

My question is, Would I be able to simply transfer my wife her half of the money all in one go as she wasn't getting it paid directly this whole time? I can't rewind the clock and start halving the money since the start of 2020-2021 so I'm wondering if it matters if you transfer it all at once or if you have to split the income up over each month.

I just don't want to make any more costly mistakes!

Many thanks

oldbikebloke

what is the business entity?
- "sole" trader: wife would need to be an employee paid through PAYE, or the business entity will need to be changed 
- partnership: you and wife as partners. Formal partnership accounts done with relevant profit share split
- limited company: wife either employee (rules around rate of pay) or co-director (more flexible over rate of pay) paid through PAYE.  (If also shareholder she obviously could get dividends as well as, or instead of pay, but you'll need advice on how to "give" her a shareholding to underpin that)

nature of wife's work for the business? rate of "pay" should bear realistic relation to the "complexity" of the work done or will fall foul of settlements legislation
- actual fee earning activity 
or 
- "admin" role 

premiumz

oldbikebloke said:

what is the business entity?
- "sole" trader
- partnership
- limited company

Sole trader

oldbikebloke

premiumz said:

oldbikebloke said:

what is the business entity?
- "sole" trader
- partnership
- limited company

Sole trader

then she has no entitlement to the profits. She would need to be an employee via PAYE

premiumz

oldbikebloke said:

premiumz said:

oldbikebloke said:

what is the business entity?
- "sole" trader
- partnership
- limited company

Sole trader

then she has no entitlement to the profits. She would need to be an employee via PAYE

So even though she works on the business like I do she wouldn't be paid some of the profits?
Doesn't sole trader businesses that have some staff, pay their staff some of the profits for working for them? For example, a builder that might have a laborer? I remember working for someone who was self employed and he paid me and I then went and did my own tax.

oldbikebloke

premiumz said:

So even though she works on the business like I do she wouldn't be paid some of the profits?
Doesn't sole trader businesses that have some staff, pay their staff some of the profits for working for them? For example, a builder that might have a laborer? I remember working for someone who was self employed and he paid me and I then went and did my own tax.

the construction industry has its own rules for "sub contractors" - if that is the nature of your activity then I'll explain further, if not then, as i said, a wife cannot simply be "given" money by a sole trader outside of a payroll set up 

the clue is in the name SOLE trader
anyone else "involved" in the business is either an employee (on payroll) or a self employed contractor (ie sole trader in their own right) working for you under a formal contract. The latter, for husband and wife in the same business, would run slap bang into settlements legislation designed expressly to cover income "shifting" like you are trying to do 

[Deleted User]

And you start losing the personal allowance at £1 rate for every £2 over 100k. At £125000 it’s gone.

Jeremy535897

If you employ your wife, you can only pay her what you would pay a third party to do that work. Make her a partner, and you can divide profits how you like. In your shoes, I would bring her in as a partner immediately, so that you can give her 99% of the profit from now to 5 April (you can flex the percentages as you like and when you like) but there are other considerations, for example:

• she will be jointly and severally liable for partnership debts (except income tax)
• VAT registration will need to change
• any business paperwork, bank accounts, marketing material etc will need to be changed

You start to lose personal allowance at £100,000 income, and lose it all at £125,000. With class 4 NIC, the marginal rate in that band is 62%.

[Deleted User]

Jeremy535897 said:

If you employ your wife, you can only pay her what you would pay a third party to do that work. Make her a partner, and you can divide profits how you like. In your shoes, I would bring her in as a partner immediately, so that you can give her 99% of the profit from now to 5 April (you can flex the percentages as you like and when you like) but there are other considerations, for example:

• she will be jointly and severally liable for partnership debts (except income tax)
• VAT registration will need to change
• any business paperwork, bank accounts, marketing material etc will need to be changed

You start to lose personal allowance at £100,000 income, and lose it all at £125,000. With class 4 NIC, the marginal rate in that band is 62%.

Perfectly put! Just for completeness I would also introduce a regular drawing to her. Whether she takes one or not has no bearing of any kind but, as I say, just for completeness. Finally, she should know that she is a partner. 

Jeremy535897

purdyoaten2 said:

Jeremy535897 said:

If you employ your wife, you can only pay her what you would pay a third party to do that work. Make her a partner, and you can divide profits how you like. In your shoes, I would bring her in as a partner immediately, so that you can give her 99% of the profit from now to 5 April (you can flex the percentages as you like and when you like) but there are other considerations, for example:

• she will be jointly and severally liable for partnership debts (except income tax)
• VAT registration will need to change
• any business paperwork, bank accounts, marketing material etc will need to be changed

You start to lose personal allowance at £100,000 income, and lose it all at £125,000. With class 4 NIC, the marginal rate in that band is 62%.

Perfectly put! Just for completeness I would also introduce a regular drawing to her. Whether she takes one or not has no bearing of any kind but, as I say, just for completeness. Finally, she should know that she is a partner. 

Indeed. I meant to mention that OP's wife must register as self employed and get a unique taxpayer reference, and the new partnership will also need a UTR. See https://www.gov.uk/register-for-self-assessment/self-employed

With income at this level, OP should have an accountant.

Grumpy_chap

purdyoaten2 said:

And you start losing the personal allowance at £1 rate for every £2 over 100k. At £125000 it’s gone.

Just for completeness, this is PROFITS not REVENUE / INCOME.

Jeremy535897 said:

With income at this level, OP should have an accountant.