Higher rate tax payer with side income looking for tax planning advice

[northernbond]

I currently have a full-time job with a salary that takes me into the higher rate tax band in Scotland (41% tax brand). I salary sacrifice as much of my income as I can into my pension to take advantage of the pension tax relief while keeping within the 40k annual allowance. After salary sacrifice, my salary is still just in the 41% tax band.

Over the last few years, I have been developing a few mobile apps out with my day job which have generated a small income from ads. This has fallen within the £1000 trading allowance so I have not had to pay any additional tax on the income.

One of my apps has recently started to get a bit of traction and revenue has begun to increase. It looks like this tax year (20-21) revenue will be around £6000 so I plan to register as a sole trader and submit a self-assessment tax form to pay the tax due.

While looking into this I have been weighing up whether it is worth setting up as a limited company. While it is hard to predict what next years app turnover could be, I imagine the upcoming year could be £10-20k. Expenses for the side hustle include some development software (£100-200 per year), server hosting (£120 per year) and frequent phone and laptop upgrades (every 1 to 2 years). I do not plan to go full time with this side hustle and do not see the revenue being consistent.

My wife has started helping out with customer support for the applications on a fairly regular basis. I believe it may be possible to employ my wife as a sole trader or as a limited company and pay her a small wage. She currently works full time but is in the lower rate tax band (21% Scottish band).
I would also like to explore the option of paying into a pension to take advantage of her pension tax relief.

I'm looking for some advice on whether to stick with being a sole trader, look at going into a partnership with my wife or go down the route of setting up a limited company.

 

[Mr D]

You don't employ a sole trader or limited company. Your business can contract with them. However the tax office dislike people acting as businesses when they are employees.
So be careful of even contracting if yours is the only business they contract with.

 

[STDFR33]

Depending on your wife’s earnings, a partnership might be the best option.

 

[UKSBD]

I think, when the OP says;

I believe it may be possible to employ my wife as a sole trader or as a limited company and pay her a small wage.

he doesn't mean his wife will be a sole trader or limited company, but he (as a sole trader or limited company) will employ her.

OP, you need to consider whether the accountancy fees make it viable or not.

These could easily be £1000+ which is a big % of only £6k
(probably still worth it though)

 

[northernbond]

My wife is a 21% Scottish tax payer and has a fair amount of headroom before hitting the higher rate of 41%. She also has a lot of annual pension allowance remaining.

I could see earnings being 10-20k in 21/22 so I feel paying my wife a proportion either by employing her (with me keeping as a sole trader), going for a partnership or setting up a LTD seems to probably be worth it.

I will look more into the partnership route as they could be a good middle ground between a sole trader and limited company. I have a fair understanding of expenses that can be claimed as a sole trader including allowable working from home expenses. Do the same expenses apply to partners in the partnership?

 

[Scalloway]

Do the same expenses apply to partners in the partnership?

They are exactly the same.

 

[northernbond]

That's good to know. If both partners work from the same house could only one claim for certain work from home expenses?

 

[Scalloway]

If you share a home I would think you can only claim one set of expenses.

 

[Cloud Accounting]

Keep it simple, remain self employed* at least till your income tops ~£20k a year. Pay your wife as much as you reasonably can (with reference to market rates) for the role she's doing, thus shifting more of the profits onto her at a lower tax rate.

*Unless the limited liability element is a factor.

 

[northernbond]

If I keep as a sole trader and pay the wife. Do I need to set her up as an employer with PAYE? If so is that relatively easy to do?

 

[Financial-Modeller]

If you incorporated, you would have added flexibility of splitting the shareholding at rate other than 50/50, but the best advice would be invest some of that GBP6k in some time with a decent accountant / tax advisor @northernbond

 

[Scalloway]

Do I need to set her up as an employer with PAYE?

If she is already in taxable employment then you need to register for PAYE as she will automatically pay tax on any other income.

Setiing up PAYE.

https://www.gov.uk/register-employer

 

[Cloud Accounting]

If I keep as a sole trader and pay the wife. Do I need to set her up as an employer with PAYE? If so is that relatively easy to do?

You'd need to register with HMRC for PAYE & then set up & operate a payroll system. Not rocket science but depends whether you want to invest the time getting to grips with it or pay someone else. Outsourcing payroll is usually pretty cheap.