The Family Payroll File: Paying a Spouse Properly in 2026/27

Many sole traders and owner-managed companies ask whether they can pay a spouse or civil partner a salary and deduct it from the business. The short answer is yes, but only where the work is genuine, the pay is commercial and the paperwork stands up to scrutiny. In 2026/27, HMRC continues to look closely at family employment arrangements, particularly where the salary appears designed to move income into a lower-tax pair of hands rather than reward real work.

At Taxxa, the practical message is simple: treat a spouse like any other employee. If you would not pay an unrelated person for the same duties, the arrangement is unlikely to survive a review.

Start with the work, not the tax

Before deciding on a salary, identify what the spouse actually does. A useful test is to write a job description as if you were recruiting for the role. Common examples include bookkeeping, credit control, customer enquiries, diary management, stock control, social media administration or site administration. The description should set out duties, responsibilities, reporting lines and expected hours.

Support that description with evidence. A short employment contract, a note of agreed hours, timesheets or a work diary, and a separate record of payments all help. Where the business is a company, board minutes or a written employment offer can add useful context. For a sole trader, a simple contract and a clear record of duties are usually enough, provided they reflect reality.

This is not bureaucracy for its own sake. If HMRC asks why the business paid a spouse, the strongest answer is a file showing what was done, when it was done and how the rate was set.

What counts as a reasonable salary?

A reasonable salary is broadly what the business would pay an unrelated person with the same skills, experience and responsibilities. That means considering the market rate for the role, not simply choosing a figure because it matches the personal allowance.

The personal allowance remains £12,570 for 2026/27, and it is common for family businesses to set a spouse's salary at or below that level to reduce income tax and National Insurance. That can be a legitimate outcome where the work justifies the pay. The trap is starting with the tax figure and inventing the job afterwards. A salary that is clearly above or below the market rate for the duties performed may be challenged.

Also consider the spouse's wider position. If they already have income from another job or a pension, an additional salary may be taxed at a higher rate and may affect student loan repayments or child benefit. A salary that looks efficient in isolation may not be efficient for the household as a whole.

Payments must actually be made. Crediting a director's loan account or simply noting an amount in the accounts is not the same as paying wages. Use a separate bank payment where possible, issue payslips and keep payroll records.

PAYE and National Insurance

A spouse on the payroll is subject to the same PAYE rules as any other employee. Depending on the level of pay, the employer may need to register for PAYE, operate payroll software and submit Real Time Information returns. Income tax is deducted where earnings exceed the employee's available allowances, and employee National Insurance applies above the primary threshold.

Employer National Insurance is also due above the secondary threshold. The Employment Allowance can reduce an eligible employer's National Insurance bill, and for many small family businesses it is a valuable relief. Eligibility depends on the employer's circumstances. For example, a company with only one employee who is also a director cannot usually claim the allowance, but adding a genuine spouse employee can change the position. The allowance is not a reason to create a job that does not exist, but it is a reason to check eligibility once a real employment arrangement is in place.

Do not overlook auto-enrolment. If the spouse meets the earnings and age criteria, the business may have pension duties, including assessing the employee and providing a qualifying scheme.

National Minimum Wage pitfalls

A family member is still entitled to the National Minimum Wage or National Living Wage where they are a worker. Paying a spouse a token amount for hours that clearly exceed the minimum wage equivalent is a risk. If the role requires regular hours, calculate whether the salary covers at least the applicable minimum rate for those hours.

The rules are not avoided by calling the arrangement informal or by relying on the fact that the couple share a bank account. If there is a worker relationship, minimum wage law applies. Keep hours realistic and review the rate annually when the new National Minimum Wage rates take effect.

The settlements rules and why documentation matters

HMRC has powers to challenge arrangements that redirect income to another person without a genuine commercial basis. The settlements rules can apply where one person provides the income source or capital and another receives the income, particularly where the original provider still benefits. A genuine salary for genuine work is not the same as a settlement, but the distinction depends on the facts.

That is why a paper trail matters. HMRC may ask for the employment contract, job description, payroll records, bank statements and evidence of the rate paid. If the spouse is also a shareholder, keep salary and dividends separate. Dividends are paid because of share ownership, not because of work, and the two should not be blurred.

A common warning sign is a salary that appears only at year end, with no regular payroll and no evidence of work during the year. Another is a job description that changes to fit the salary. Both invite questions.

Sole trader or company?

For a sole trader, wages paid to a spouse are allowable for tax purposes where they are wholly and exclusively for the trade and are reasonable for the work done. The spouse is an employee, so PAYE and National Insurance rules apply in the normal way.

For a company, a spouse's salary is generally deductible for corporation tax if it is genuine and commercial. The company must operate PAYE and account for employer National Insurance where due. The Employment Allowance may reduce the employer National Insurance cost, subject to eligibility. A spouse can be both an employee and a shareholder, but the company should document the employment separately from the shareholding.

A practical checklist for 2026/27

Before putting a spouse on the payroll, assemble the following:

• A written job description and employment contract.
• Agreed hours, duties and reporting arrangements.
• Evidence of the market rate used to set the salary.
• Timesheets, a work diary or other records of work done.
• Payslips, payroll submissions and bank payments.
• A separate record of any dividends or shareholder payments.
• An annual review of pay, hours and minimum wage compliance.

The bottom line

Employing a spouse can be tax-efficient, but it is not a licence to split income. The arrangement works best when it looks and behaves like a normal employment relationship: real duties, commercial pay, proper payroll and clear records. In 2026/27, HMRC's focus is on substance rather than labels. If the work is genuine and the paperwork supports it, a family payroll can be a sensible part of the business structure. If it is not, the tax saving may be temporary and the compliance cost considerably larger.