Can I pay my spouse from my limited company? Usually yes, with conditions

A salary makes your spouse an employee of the company. The company runs them through payroll, deducts income tax and National Insurance, pays employer’s National Insurance where it is due, and claims the cost against profit before corporation tax. That last part only works where the wage is for the purposes of the business and in proportion to the work.

Dividends make your spouse a shareholder. The company pays out of profit it has already earned and already taxed, so there is no corporation tax deduction, and dividends go to everyone holding that class of share. Your spouse then has their own dividend allowance and their own basic rate band to use.

In practice the two work together. A modest salary uses the personal allowance and can keep a National Insurance record ticking over. Dividends move profit to someone who may be taxed on it at a lower rate than you are. We look at both sides at once, because changing one without the other usually moves the problem rather than solving it. The full picture sits in salary, dividends and personal tax.

HMRC’s position on family employment is not mysterious. Employment by a spouse counts where it is for the purposes of that spouse’s trade, business, profession or vocation. Employment for private reasons is disregarded. Put plainly, if your spouse does nothing for the company, a wage from the company is not a business cost and will not reduce your corporation tax.

So the test we apply before anyone goes on payroll is simple. What does your spouse actually do, how many hours, and what would you pay an unrelated person to do the same thing? Bookkeeping, invoicing, chasing payment, diary and client admin, running your social accounts, handling suppliers. All of it counts. Paying someone twelve thousand pounds for two hours a month of filing does not.

Three things then have to be true:

• The company is registered as an employer and the pay is reported through payroll each time it is run.
• The money actually leaves the company and reaches your spouse, ideally into an account in their name, not an entry sitting in the accounts all year.
• Auto-enrolment is dealt with properly, because a second person on the payroll changes your duties. That sits under payroll and auto-enrolment.

The dividend route is usually the bigger lever for professional services directors, and it is the one that gets done casually. Giving your spouse ordinary shares that carry the full rights of ownership, votes, capital and income, is a gift between spouses, and the spousal exemption in the settlements rules generally keeps it out of trouble. That was the ground HMRC lost in Jones v Garnett. Where directors get into difficulty is with shares engineered to carry a right to income and little else, or share classes created purely to point a dividend at one person in one year.

The administration matters just as much, and it is the part most companies skip:

• There has to be enough distributable profit, this year or carried forward, before the dividend is declared.
• The directors declare the dividend at a meeting and keep the minute, even with one director.
• Each payment needs a voucher showing the date, the company, the shareholder and the amount, with a copy kept.

Take out more than salary and properly declared dividends and it becomes a director’s loan, with its own tax consequences. Paperwork written up in a rush at year end is how a dividend turns into an overdrawn loan account nobody budgeted for.

There is a second reason to look at this, and it has nothing to do with your spouse’s tax rate. A company where the only person on the payroll is the sole director cannot claim the employment allowance, which is worth £10,500 against employer’s National Insurance. Put a second genuine employee on the payroll and the company is back in reach of it.

I am careful about how this gets presented, because the allowance is not a reason on its own to invent a job. The order has to be the right way round. If your spouse already does work for the company and has never been paid for it, putting them on payroll at a sensible rate for that work is ordinary business, and the allowance follows. If they do nothing, the wage is not deductible and the allowance was never the point.

For most of the professional services companies we take on, the first conversation finds both at once: a spouse who has been doing the admin unpaid for years and a company that has never claimed an allowance it could have had. We wrote about that one on its own in the £10,500 employment allowance single-director companies miss.

The patterns repeat. A wage posted in the accounts every month that never left the bank account. A spouse paid well above the rate for the job, which gets the excess disallowed and leaves the director arguing about the rest. Pay going straight into a joint account with nothing to show it was ever the spouse’s money, which is thin ground if anyone asks.

On the dividend side, the common one is a dividend declared with no profit behind it, discovered at year end when the accounts show the reserves were already gone. Another is a company with two shareholders paying a dividend to one of them only, when a dividend on that class of share has to go to everyone holding it.

None of this is difficult. It is a payroll run, a board minute, a voucher and a bank transfer in the right direction. What it is not is something to reconstruct nine months after the year end from memory. We set the arrangement up once, write down what it rests on, and run it the same way every month so the records exist before anyone needs them.