Can I Employ My Spouse in My Business? The Tax Rules Explained for 2026/27

28 Sep Can I Employ My Spouse in My Business? The Tax Rules Explained for 2026/27

Employing your spouse or partner can be a legitimate and tax-efficient arrangement for a small business. It is not, however, a shortcut for moving profits without substance.

The key question is simple: does your spouse carry out genuine work for the business, and are they paid a reasonable amount for that work?

If the answer is yes, you can generally employ them in the same way as any other member of staff. You will need to consider the tax treatment, National Insurance, PAYE, Real Time Information (RTI), employment law and your record-keeping responsibilities.

This guide explains the main rules for the 2026/27 tax year.

Can I legally employ my spouse or partner?

Yes, provided the employment is genuine and commercially justifiable.

Your spouse or partner might help with:

• Bookkeeping and invoice processing
• Administration and diary management
• Marketing and social media
• Customer enquiries
• Stock control and order processing
• Production, research or operational work
• Website updates and business development

There is no general rule preventing you from employing a family member. HMRC is mainly concerned that the arrangement reflects a real employment relationship rather than an artificial attempt to divert profits.

For the business to claim tax relief on their wages, the cost should be incurred wholly and exclusively for the purposes of the business. In practice, this means:

• The work must be genuine.
• The duties must benefit the business.
• The salary should be reasonable for the role, hours and experience.
• The wages should actually be paid.
• Payroll and employment records should be maintained.

This is a normal arrangement for many family-run businesses. However, it should be set up properly from the beginning. If you would not pay an unrelated employee the same amount for the same work, the salary may be difficult to defend.

How can employing your spouse be tax-efficient?

The main benefit is that two separate taxpayers can use their own allowances and tax bands.

For 2026/27, the standard personal allowance is £12,570. If your spouse has no other taxable income, a salary up to this amount will usually be covered by their personal allowance, meaning no income tax is payable on the salary.

The business receives tax relief for the salary:

• For a sole trader, the salary is normally deducted when calculating taxable business profits, provided it meets the wholly and exclusively test.
• For a limited company, the salary is generally an allowable business expense, reducing the company’s taxable profit. Employer National Insurance may also be deductible.

This can be useful where one spouse has higher income and the other has unused allowances. For example, if you are a higher-rate taxpayer and your spouse has little or no income, paying them for genuine work can move some income from your higher tax position into their unused personal allowance or basic-rate band.

The arrangement is not about simply transferring money between spouses. It works because your spouse is being paid for real work and taxed separately on their employment income.

You should also check their other income, such as:

• Another job
• Pension income
• Rental income
• Savings interest
• Dividends

Their personal allowance may already be partly or fully used elsewhere.

How much can I pay my spouse before tax or National Insurance?

A salary of up to £12,570 may be free of income tax if your spouse has no other taxable income, but the National Insurance position needs closer attention.

The main 2026/27 figures to consider are:

• Personal allowance: £12,570 per year
• Employee National Insurance primary threshold: generally aligned with £12,570 per year
• Lower Earnings Limit: £6,708 per year, or £129 per week
• Employer National Insurance secondary threshold: £5,000 per year, or £96 per week

A salary around the Lower Earnings Limit can help your spouse build a qualifying National Insurance record without usually creating employee National Insurance deductions. A salary up to the personal allowance can generally avoid income tax, assuming they have no other taxable income.

However, an employer may still have to pay employer National Insurance on earnings above the secondary threshold. For example, paying £12,570 could create employer National Insurance on the amount above £5,000, unless an exception or Employment Allowance applies.

The most tax-efficient salary is therefore not automatically £12,570. It depends on:

• Whether the business is a sole trade or limited company
• Whether Employment Allowance is available
• Your spouse’s other income
• The value of the work performed
• Whether the company has sufficient profits
• Whether pension and state benefit considerations matter

Use the current HMRC rates and thresholds for employers in 2026/27 when calculating the final figure.

Salary or dividends: which is better for a limited company?

Salary and dividends are taxed differently, so the right mix depends on your company and personal circumstances.

A spouse working for your limited company can receive a salary. They may also receive dividends if they genuinely own shares in the company and the company has sufficient distributable profits.

Salary

A salary:

• Is normally deductible for corporation tax if it relates to genuine work.
• Must be processed through PAYE.
• May create employer National Insurance.
• Gives the employee earnings from employment.
• Can be paid even when the employee is not a shareholder.

Dividends

Dividends:

• Are paid from profits after corporation tax.
• Are not a corporation tax-deductible expense.
• Do not normally create National Insurance.
• Can only be paid to shareholders according to their share rights.
• Require proper dividend paperwork and sufficient distributable profits.

For 2026/27, the dividend allowance is £500. Dividend income above that allowance is taxed at:

• 10.75% within the basic-rate band
• 35.75% within the higher-rate band
• 39.35% within the additional-rate band

See the GOV.UK guidance on tax on dividends for the current rules.

Do not make your spouse a shareholder merely to receive dividends without taking advice. Share ownership, voting rights, the company’s articles and the wider anti-avoidance rules all need to be considered. A limited company accountant can compare salary, dividends and employer National Insurance before you decide.

What PAYE and RTI responsibilities apply?

Your spouse must be treated like any other employee for payroll purposes.

If you employ your spouse at a level requiring a PAYE scheme, you will need to:

• Register as an employer with HMRC.
• Collect starter information and their National Insurance number.
• Run payroll on the agreed payment schedule.
• Calculate income tax and employee National Insurance where due.
• Calculate employer National Insurance where due.
• Issue payslips.
• Submit an FPS to HMRC through RTI on or before payday.
• Pay deductions to HMRC by the relevant deadline.
• Keep payroll records.

Even if your spouse pays no income tax or employee National Insurance, you may still need to run payroll and submit RTI reports. Do not wait until the end of the tax year and enter one large backdated salary. That can make the employment look artificial and may create avoidable penalties.

Harrison’s Accountancy provides payroll services for small businesses, including payroll calculations, payslips, RTI submissions and advice on HMRC payments.

How do I set a market-rate salary?

Base the salary on the role, hours and responsibilities rather than the tax saving you want to achieve.

Start by writing a short job description. It should explain:

• The position title
• Main responsibilities
• Expected hours
• Location or working arrangements
• Reporting responsibilities
• Pay frequency
• Holiday entitlement
• Notice arrangements

Then consider what you would pay an unrelated employee for comparable work. You can review:

• Current job adverts
• Recruitment websites
• Salary surveys
• Local pay levels
• The person’s qualifications and experience
• The number of hours actually worked

For example, if your spouse spends six hours each week processing invoices and managing customer records, a modest part-time salary may be commercially reasonable. A full-time salary for a few hours of occasional help would be more difficult to justify.

You must also consider the National Minimum Wage and other employment rights. The rules can be complex where a family member lives in the family home and works in a family business, so take advice rather than assuming an exemption applies.

What records should I keep for HMRC?

Good records show that the employment is real, the salary is fair and the work is connected to the business.

Keep:

• A written employment contract
• A job description
• Evidence of how the salary was calculated
• Timesheets or work logs
• Emails and completed work
• Copies of payslips
• Payroll reports
• RTI submission confirmations
• Bank statements showing salary payments
• Holiday and absence records
• Notes of salary reviews

For a sole trader, these records support the deduction claimed in your accounts and Self Assessment return. For a company, they support the salary expense recorded in the company accounts and corporation tax computation.

You should also keep separate personal and business finances. Pay your spouse from the business bank account into their own account, rather than simply recording a year-end journal entry.

You can read more about how Harrison’s Accountancy supports sole traders and prepares annual accounts for limited companies and sole traders.

Is employing my spouse right for my business?

It can be tax-efficient, but the arrangement should start with the business need rather than the tax result.

Before making a decision, ask:

• What work will my spouse actually do?
• How many hours will they work?
• What would I pay another person for the same role?
• Do they have other income?
• Will employer National Insurance apply?
• Should they receive salary, dividends or a combination?
• Can I maintain the required payroll and employment records?

If your spouse has a genuine role, paying them through payroll is a normal and legitimate business arrangement. The tax benefit follows from paying the right person for the right work; it should not be the sole reason for creating the role.

Harrison’s Accountancy can help you set up the arrangement correctly, compare the salary and dividend options, run payroll and keep your records organised. Whether you need a small business accountant, a limited company accountant or a sole trader accountant, contact Harrison’s Accountancy to discuss your circumstances.

This article provides general information for the 2026/27 tax year and is not a substitute for advice based on your full business and personal position. Tax rules and thresholds can change, so confirm the figures before implementing an arrangement.