Many business owners pay their spouse a salary – typically up to the Personal Allowance limit (£11,850 in 2018/19).

If the spouse has no other taxable income, they will not pay tax on their salary – and the business owner saves tax (at 19%, 20% or 40%) on the salary paid.  e.g. a salary of £7,000 to the spouse could save £1,400 tax overall (plus National Insurance at 9% for sole-traders; or plus Dividend tax at 7.5% (for Limited Companies). 

But, if the salary is not actually “earned”, then the tax relief can be disallowed by HMRC for not being a genuine expense. The wages must be appropriate for the contribution made to the business.  For example, if your wife only works in the business 5 hours per week, then the level of pay should reflect this. 

The wages should also be physically paid as they are earned, and, be in line with a payroll supported by a contract of employment, or an offer letter