It has been traditional in the accounts for a sole trader to create an expense of 'wife's wages', so that a wife (or husband if the wife is the main earner) sets some income against personal allowances. Provided the wife actually does some work - for example, all the record-keeping and sending out invoices - this is above board. But can this still be done now we are subject to RTI? It always used to be that the wife's wages were below the threshold for PAYE, so the nominal wages only appeared in the accounts of the main earner - no other communication with HMRC was required. Under RTI, does the main earner now have to set up a payroll to allocate some 'wife's wages'?
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no different to any other employee
If there is a PAYE scheme then yes the wages need to be reported under RTI;
If there isn't a PAYE scheme then no they don't.
If the wife is the only employee then as long as she is paid less than the LEL (currently £112pw) then there is no requirement to have a PAYE scheme.
The wife's wages need to be justifiable in terms of work done,but there must also be evidence of payment.
Evidence of Payment
... but there must also be evidence of payment.
Isn't that the issue with married couples (and other social partnerships) that the private bank account is not necessarily separate from the business, and even if they are, they withdraw what they need - as one withdrawal - not two?
In these circumstances, has an HMRC challenge happened? Or is it theoretical? (I'm currently advising a client on this).
If the wife has another job then a PAYE scheme is required regardless of the level of wages paid.
Partnership is another option.
If the husband and wife set up as a partnership she would receive a share of the profits, which she would need to declare on an SA return. This is treated like self-employment so no need for PAYE/RTI on this even if the wife is over the LEL. No problem if she is also employed and in PAYE in another job. Her share of the profits can be either a straight percentage, or a fixed fee ("salary") element plus a share of the balance of profits, subject to any adjustment necessary to ensure one partner does not make a profit while the other makes a loss.
She will (currently) pay Class 2 and Class 4 NI if over the relevant limits on her self-employed income, and of course income tax is calculated on her total income.
If her self-employed income is under the Small Profits Threshold (£5965) she can elect to pay Class 2 voluntarily, which could be worth considering if she needs NI contributions to build up her state pension entitlement - it's much cheaper than Class 3! This may change as Class 2 is phased out so needs watching, although current indications are that these voluntary contributions are expected to continue.
Voluntary Class 2
You are right F1 fan. If she is paying Class 1 in another employment (or is over the LEL in that job) voluntary class 2 would give no additional benefits, although it can be very useful for someone who does not also have employment income above the LEL.