Employing family through multiple contracts

You own several businesses, and your spouse is on the payroll of one of them. A colleague has suggested you could save NI for her and the company if you split her salary between the companies. Is he correct?

NI v tax

Whilst NI is in effect a tax on income, the rules for calculating it differ significantly from those for income tax. For example, individuals each have a single tax-free allowance (the personal allowance; £12,570 for 2021/22) whereas they’re entitled to a separate NI-free allowance, known as an earnings threshold (£797 per month), for each job they hold. Employers also each have an NI threshold (£737 per month). Theoretically, if you own two or more businesses you could split an employee’s salary between them to reduce their and NI bills.

Example. Jack owns two companies, Acom Ltd and Bcom Ltd. He pays an employee a salary of £2,500 per month through Acom alone. The NI liabilities for the company and the employee are.

If instead Jack paid the employee a salary of £1,250 each from Acom and Bcom, the NI liabilities would be:

Splitting the salary increases the employee’s take home pay (by reducing their NI bill) by £96 per month (£1,152 per year) and Jack’s companies save £101 per month (£1,212 per year).

Anti-avoidance

A special rule prevents business owners taking unfair advantage of the system to slash their NI and wages bills by simply setting up multiple payrolls. It says that salaries paid by employers who operate “in association” with each other must work out NI as if the salaries were paid by just one business. “Association” has a special definition for NI purposes; it isn’t the same as that for tax purposes. The effect is that splitting a salary solely to save NI won’t usually work. However, it doesn’t mean that it can’t or shouldn’t be done in the right circumstances.

Tip. NI savings are easily overlooked if for convenience an employee is on the payroll of one of your businesses but actually works for more than one. If you have two or more businesses which operate independently of each other for NI purposes, and one or more of your employees, say a bookkeeper or manager, works for more than one, you’re entitled to split their salary and calculate their NI using multiple NI thresholds. This would require joint or multiple employment contracts so involve HR as well as the payroll manager in the arrangements.

Anti-avoidance rules prevent businesses from saving NI by splitting salaries between multiple payrolls. However, subject to conditions it is possible, ad should be seriously considered if an employee (including a spouse or partner) does work for more than one of your businesses.