Introducing Your Spouse or Civil Partner Into Your Business: Employee or Partner?

By Wingate Accountants Ltd | enquiries@wingateaccountants.co.uk

Overview

When running a small or family business, it’s not uncommon to consider involving your spouse or civil partner in the operations—either by employing them or introducing them as a business partner. While the instinct might be to pay them a salary for basic tasks, there could be greater tax efficiency in granting partnership status. This article explores both options and outlines the key differences from a tax, compliance, and risk perspective.

National Insurance Contributions (NICs)

One of the most significant advantages of partnership over employment lies in National Insurance contributions:

• Employees: For 2024/25, employee NICs are charged at 8% on earnings between the primary threshold (£12,570) and the upper earnings limit (£50,270). Employers must also pay 13.8% NICs on earnings above the secondary threshold (£9,100). These employer contributions, despite their name, do not count towards any additional state benefit entitlement and are effectively a payroll tax.
• Partners (Self-Employed): Treated as self-employed, partners pay Class 4 NICs at 6% on profits between £12,570 and £50,270, and 2% on profits above this. Importantly, there are no employer NICs for partners.

This significant difference means that, in most cases, making your spouse or civil partner a partner is more favourable from an NICs standpoint.

Compliance & Administration

Employing someone introduces a set of obligations, such as operating PAYE, producing payslips, and making year-end filings to HMRC. On the other hand, a partner simply registers for self-assessment and files an individual tax return along with the partnership return.

For example, a sole trader involving a spouse as a partner will move from submitting one tax return to three—two personal returns and one partnership return. Still, this is generally less burdensome than operating payroll above the PAYE threshold.

Wages vs. Profit Sharing

HMRC closely scrutinises wages paid to spouses, particularly if they exceed what would be paid to an unrelated employee. Any excessive amount may be disallowed unless it can be justified as “wholly and exclusively” for business purposes.

However, profit shares through partnership arrangements are not subject to the same level of challenge—though the settlements legislation may apply in extreme cases, particularly where one spouse contributes little or no work.

Liability Considerations

While employment carries limited personal financial exposure, making someone a full partner in an unlimited partnership can expose them to the entirety of the firm’s debts—even for liabilities they didn’t cause.

Therefore, many business owners may prefer to shield their spouse from such risks by opting for employment unless limited liability can be introduced.

Limited Liability Partnership (LLP) Alternative

An LLP can be a middle ground—offering the tax flexibility of partnership with liability protection. However, it comes with stricter rules:

• The partner must have significant influence over the business, or
• Invest capital worth at least 25% of expected income, or
• Have at least 20% of income based on overall LLP profits.

If these conditions aren’t met, HMRC may treat the individual as an employee for tax purposes.

Settlements Legislation: A Word of Caution

Under the settlements rules, income shifted to a spouse may still be taxed on the original earner unless the transfer is structured carefully. However, the landmark Arctic Systems case (2007) confirmed that dividend income paid to a non-working spouse via shares in a company was not automatically taxable on the transferor spouse.

While the government considered tightening these rules, no changes have been implemented so far. This means that bringing a spouse into the business—as a partner or shareholder—remains a viable and tax-efficient strategy.

Practical Takeaway

Choosing between employing your spouse or making them a partner involves a balance of tax planning, compliance costs, and liability exposure. For many, the partnership route (or LLP structure) offers better tax efficiency, especially around NICs, but it requires careful planning to manage legal and financial risks.

Before making changes, it’s essential to seek professional advice tailored to your specific situation.

Wingate Accountants Ltd | Helping families run tax-efficient businesses with confidence.
📧 enquiries@wingateaccountants.co.uk | 📞 0203 488 7505