If you have members of your family helping you out in your business, you could get an incredible 53% tax relief, says Finance Confidential. Here’s how.
If, say, you pay your wife a gross salary of £4,800 (this has to be a fair market rate), you will immediately reduce your tax bill by 40% of the payment (£1,920). And because, as a higher-rate taxpayer, you are also paying Class 4 National Insurance contributions at 1%, the tax saving is actually 41% (a further £48) – so the after-tax cost of her salary is £2,832. As long as your spouse remains below her tax-free personal allowance of £5,435, she won’t have any income tax to pay on this either.
The additional tax relief comes if she invests the entire £4,800 into a pension fund, assuming she doesn’t need it. Note that as an employee, and not a higher-rate taxpayer, she cannot actually claim the 20% relief herself; the tax is claimed by the pension fund, but the pension fund can still treat the payment as being net of tax, boosting her pot by £1,200. “So there we have it; £6,000 in the pension fund, at a real cost of just £2,832 – tax relief of 53%.”