I’m a 50/50 owner of a tech business currently turning over about £3M. For the last 3 years we’ve been paying ourselves under PAYE. – £75k And employ our spouses at £35k.

Our spouses don’t have many active duties but we previously understood this was a legitimate way to reduce our household tax burden. More on this in a bit.

We don’t take any dividends because we claim R&D tax credits. We continually invest in our technology platform. So the company doesn’t make a profit, yet.

Now to my question.

My business partner has just split with his spouse and we plan to pay the spouse redundancy and put my business partners salary up to the equivalent take home they had before. So we’re both paid the same.

However, they now also want to make my spouse redundant aswell and increase my salary.

Their concern is that HMRC will audit us and we’ll be taken to a tribunal for artificial employment.

This is going to come at a huge financial cost to the business (easily another £30-£40k) and I’m struggling to understand what, if anything, we’re doing wrong. Surely, I can write a job description for my spouse and assign them some duties so it looks more legitimate?

An alternative idea I had was to reduce ny spouses pay instead, e.g. the tax free allowance of around £12.5k and then increase my salary by a lower amount, reducing the cost to the company.

But they are adamant we need to remove our spouses completely asap or HMRC will punish us.

Are they right? Or is there a better way to do this?

Guidance appreciated.