Cash Clinic: How can I make use of my wife’s unused tax allowances?

QI run my own consultancy business, which makes a profit of around £70,000 a year. My wife does not work and stays at home to look after the children. I pay tax at 40 per cent but my wife’s personal tax allowances aren’t used. How can I take advantage of that and save on the amount of tax I pay?

KO, Edinburgh

AIt is possible for you to employ your wife to work in your business, but the tax rules require that the deduction in taxable profits you receive is limited to the remuneration which you would pay and this generally limits the remuneration to a very low level.

As an alternative, you might consider making your wife a partner in the business. If this is done correctly with a proper partnership agreement, the profit allocation between the partners can vary at will. HM Revenue & Customs will not usually challenge the division of partnership profits, because a partner’s profit is not a business expense it is just an allocation of the taxable profit of the business.

In your circumstances you could restrict your share of profits to £42,000 (ie below the higher rate threshold) and give your wife a profit share of £28,000.

This would achieve a 13 per cent tax saving (20 per cent tax plus 2 per cent on your National Insurance contributions less 9 per cent National Insurance payable by your wife) on around £20,000 of profits. It would also be a 42 per cent tax saving on the balance, being covered by your wife’s personal allowances.

One other upside to this planning would be that as long as neither of you earns £50,000 your family unit would not be caught by the child benefit restrictions coming into force on 7, January 2013.

This is the government’s plan to remove child benefit from families where the higher earner has a total income of more than £50,000, by levying a tax charge payable on the higher earner.

The twist comes in scenarios where the wife does not do any work for the business – she is in tax terms a “sleeping partner”. This way she will not pay any National Insurance because her share of profits are not immediately derived from the carrying on or exercise of one or more trades.

You should also think about inheritance tax (IHT) planning. One of the most simple ways to mitigate any potential IHT liability is to have a will put in place, if you have not done so already.

A will is an extremely important document which details your intentions and wishes regarding the assets contained within your estate. You may have items of sentimental value which you wish to pass on to your loved ones and having a will ensures that this will happen.

A will can also clarify your wishes for your funeral and more importantly, for the protection and education of your children or grandchildren.

• Richard Brunton is the tax manager within the private client department at HBJ Gateley

• If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given.

The Scotsman Publications Ltd and HBJ Gateley accept no liability on the basis of this article.