Dividing Profit between spouses

RL

Myself and my other half are partners in a fairly new business and after a lot of investment have ended up with profits of £6788 and £5278. Would there be any benefit in moving some profit from the lower one onto the higher one to take one of us under the NI threhhold for class 4 self employed contributions (which I think is £4345)? If anyone has any other tips on saving money in this situation I would be very grateful of some help.
RL

WHA

Firstly, consider the costs and benefits of the class 2 NIC limit. The benefits are the entitlement to limited state benefits. The cost is around £110 per year.

Secondly, do the sums. I am assuming neither of you has any other taxable income as you havn't mentioned anything else in your post.

At present, you both pay class 2 NIC of £110 each. Lower pays £31 Class 4 NIC and £38 income tax. Higher pays £151 class 4 NIC and £189 income tax. Total tax and NIC £519.


Profits have to be re-apportioned as £4,345 and £7,721. There is no tax nor NIC on the lower, but class 2 NIC of say £110, Class 4 NIC of say £226, and income tax of £371. Total tax and NIC £707.

So your "money saving" idea actually increases your overall tax and NIC by £188. What you are forgetting is that the additional profits transferred from lower to higher are subject to 8% NIC and increase their marginal tax rate from 10% to 22%.

Regardless of that, you also have to consider whether the Inland Revenue would challenge manipulation of profit shares. To be honest, I would be surprised if they did, especially as the numbers are so small. You also have to consider whether you want to "earn less" - profit shares have to be real - one partner can't "give" money back to the other partner outside the accounts as that could amount to tax evasion if found out.

Have you asked your accountant about profit sharing?