Husband-Wife Business Tax Question 9 October 2022 at 7:04PM in Cutting tax 8 replies 155 views

Drexel_Spivey

Hello everybody,

I have been running a small business for several years now and have been filing self assessment tax returns as a sole trader. My wife joined me in running the business earlier this year and I’m unsure how to proceed regarding future tax returns. The business took a real knock during the pandemic and right now while we're rebuilding it we’re not earning a huge amount so don’t pay ourselves a salary and all of our earnings simply go into a shared bank account. Should we be registering as a partnership and filing a single tax return or filing separate returns both as sole traders declaring 50% of earnings per return?

Thanks in advance.

Dazed_and_C0nfused

I suspect getting an accountant would be a sensible step.

A partnership with two partners involves filing 3 Self Assessment returns not 1.

If you aren't running this business via a limited company where does a salary come into play?

Drexel_Spivey

Dazed_and_C0nfused said:

I suspect getting an accountant would be a sensible step.

A partnership with two partners involves filing 3 Self Assessment returns not 1.

If you aren't running this business via a limited company where does a salary come into play?

Thanks for your reply.

I should’ve made it clear from the start that I’m really not well up on tax matters at all, so I wasn’t aware that salaries are something paid by limited companies only - if that is what you’re saying.

Currently, we’re really not earning enough to justify paying an accountant. In fact, since the beginning of the pandemic, as a sole trader I didn’t earn enough to pay any tax. By the end of the next tax year, however, this won’t be the case and as my wife and I are now sharing the work responsibilities 50/50, as I understand things it would make sense to split the total income received across the two of us to avoid paying more tax than necessary, i.e. double the tax-free allowance before crossing the threshold where payment is necessary.

Am I correct with this and can you or anyone else advise me on how to proceed given the extra information I’ve provided?

Thanks

Jeremy535897

It is a common misconception that what a proprietor draws from his sole trader business is relevant to the tax liability. The tax liability depends on the profit the proprietor makes, not whether or how he spends it (unless there is bank interest paid that is effectively financing personal expenditure, in which case some disallowance may arise).

The same principle applies to a partnership. The main advantage of a husband and wife partnership is that you can allocate profits between you to minimise the tax liability. The main disadvantage is that you both become jointly and severally liable for most partnership debts.

You need to register the partnership with HMRC. Your wife will need to register as self employed. If she joined the business in the year to 5 April 2023, both she and the partnership need to register by 5 October 2023, but the sooner they register, the better. See https://www.gov.uk/set-up-business-partnership

I am assuming the business is not, and does not need to be, registered for VAT.

Drexel_Spivey

Jeremy535897 said:

It is a common misconception that what a proprietor draws from his sole trader business is relevant to the tax liability. The tax liability depends on the profit the proprietor makes, not whether or how he spends it (unless there is bank interest paid that is effectively financing personal expenditure, in which case some disallowance may arise).

Thanks but I'm not sure what you mean by that. I wasn't under the impression that anything I/we spent had any impact on the amount of tax to pay, so I'm a little confused by that comment. I've always submitted my own SA return based solely on the figure left after subtracting expenses.

No, definitely not even close to earning enough for VAT.

baser999

Regardless of what the business is making, you really do need professional advice, get yourselves an accountant. They can point you in the right direction, advise whether you should work as a partnership, set up as a company and so on. Have that initial discussion, which some will offer for free, then you might not need to see them again until you’ve been trading for a year.

Jeremy535897

Yes, you pay tax on sales less expenses. Your mention of salary suggested you thought otherwise.

purdyoaten2

Drexel_Spivey said:

Jeremy535897 said:

It is a common misconception that what a proprietor draws from his sole trader business is relevant to the tax liability. The tax liability depends on the profit the proprietor makes, not whether or how he spends it (unless there is bank interest paid that is effectively financing personal expenditure, in which case some disallowance may arise).

Thanks but I'm not sure what you mean by that. I wasn't under the impression that anything I/we spent had any impact on the amount of tax to pay, so I'm a little confused by that comment. I've always submitted my own SA return based solely on the figure left after subtracting expenses.

No, definitely not even close to earning enough for VAT.

One small point not mentioned. A partnership entails the submission of a partnership return (in addition to a return for each partner). It is not possible to submit a partnership return online without specialist software. An accountant would have access to such software. 

I would also respectfully echo the sentiments of the other posters, given the questions posed - engage an accountant. You may save in the long run.

sheramber

you are taxed on your profit, which total income less expenses.

These expenses are business expenses only and do not include any salary/wages  you take or personal expense.

You will need to advise HMRC  that you ceased as a sole trader and became a partner, and prepare accounts up to the date you ceased.
If you are starting the partnership from the start of the tax year then your last return will do that.

You need to register the partnership

Your wife will have to advise HMRC that she has become a partner.

So three returns to complete at teh end of the year.

1 partnership return with total income and expenditure for partnership. On that return you will show the share of teh profit each partner has received 

2 You will complete a partner return showing your share of the profit and any other income you receive.

3 Your wife will complete a partner's return with her share of the profit and any other income she has received.


If you look online you can see what a partnership return looks like. There also notes to help you complete it.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1063805/sa800man-2022.pdf