One of my clients pays his wife a wage from the company (Limited). He is the Director and he pays her about £35,000 a year. (She doesn't actually do anything in the company except for a bit of filing now and then). She is currently on maternity leave and I have put her on maternity pay as a normal employee. The first 6 weeks has been ok as she was on 90% of her awe but now that she is on the lower maternity pay amount, my client is asking if he can't "top up" her wages. Is this possible?
There's certainly no problem topping up an employees wage. My mrs works with the local authority and she was on full pay for most of her maternity. My concern might be around is she actually an employee.
Topping up wages during maternity is perfectly normal. Obviously the government only subsidises the statutory portion of SMP (ie the £128/week after the first 6 weeks)
There are probably more tax-efficient structures than paying her £35k salary/year if he were to trust her with shares (assuming that the company is profitable)
Hi, you can work up to 10 days during your maternity pay period and these are called keeping in touch days. If you work more than this then you will loose your entitlement to maternity pay.
However you do accumulate holiday during maternity so your client could pay an element of holiday pay.
this is an age old issue about reducing tax burden by paying the wife a wage and has been the cause of all manner of cases with HMRC in the past.
I'm not thinking here about the maternity arguement which is a seperate conversation but rather the whole principle of paying a spouse who actually does nothing (or very little) for the company and whose only purpose is as a tax reduction engine.
Also see the case of Moschi v Kelly which clearly states that the spouses salary must be justifiable (So £35k p.a. for a bit of filing seems totally disproportionate) and actually paid to the spouse.
The thinking out there is that a small, minimum wage type salary for filing and admin duties is allowable and many accountants actively encourage this... But in this case £35k is obviously disproportionate to the duties (how many job applicants would you get for a filing job that paid that salary!).
Sorry to disagree with the treatment of this one but I don't think that the wife should be receiving a salary, or at least not one at this level.
Would be happy for someone to convince me that I'm wrong on this and preferably point me towards some contradictory case law,
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Sorry to disagree with the treatment of this one but I don't think that the wife should be receiving a salary, or at least not one at this level.
Would be happy for someone to convince me that I'm wrong on this and preferably point me towards some contradictory case law, SNIP
Presumably if the wife were gifted some shares then she could receive dividends instead, which would be more tax-efficient anyway. That does require a bit more trust from the current business owner though.
Many thanks for your thoughts on this one. I will tell the client that he can top up the salary. I think he has spoken to his accountant about the level of wife's wages so the accountant obviously knows about it. I think he has a meeting with the accountant this week so perhaps I will mention the option of shares and dividends being more tax efficient and see if he can discuss this with him.
Would agree with Shaun in that the salary seems disportionate to the work being done. The question the employer would need to ask is "If i was paying a third party employee to do the work would i pay them at least the same amount?" If not you may have a problem. The argument is that the money is really the husbands money for work done but put through in the wifes to pay tax at the basic rate rather than the higher rate. Though HMRC are at least getting some money (PAYE, EE NIC and ER NIC) rather than none.
If the owner is looking to extract money tax efficiently then at £35k level the most efficient way would be by means of dividends (assuming the wife doesnt have any other income). Though like may other company structures this may eventually be targeted as the Arctic Systems case of a few years ago was.
Arctic Systems has proven that a wifes income will not be taxed on her husband and so I say make hay while the sun shines and keep using this method of income extraction until we are told otherwise.
I think the issue in Arctic was that the income that Mrs. Jones received was dividend income - and one of the importance aspects was that she was a director and therefore in a position to deal with dividends being declared.
I agree with Shaun, I would feel uncomfortable if I have a company client and the wife receives £35k and effectively doesn't work in the business. Dividends are fine, salary not so much. Well, salary at £5k is OK, it's the level of salary that's the problem.
Many thanks for all your replies. I double checked the wife's salary and it is a bit lower than I said....last year was approx. £27,000. My client (the director) only pays himself minimum wage. I don't think he takes a dividend year end as they obviously have the wife's wages to live on. How uncomfortable do I need to be about this, bearing in mind that I am an Associate Member of the ICB with payroll qualification as well, so am not qualified to offer tax advice or similar. Would it be advisable to speak to the accountant/client about it or should I just leave well alone.
