Introduction: Why Employing Your Spouse Is a Two-Country Decision
Employing your spouse in your UK limited company is one of the oldest family-business planning moves in Britain, yet for an American owner it is never a purely British decision. Every pound of salary paid when employing your spouse changes the corporation tax computation, the payroll filings, the household's income tax, and, crucially, the US return that the American spouse files every April. Most guides stop at HMRC. This one does not.
At TaxYork, we prepare both sets of returns for American founders, consultants, fund principals and company owners living in Britain. In our experience, the British half of employing your spouse is usually set up well, while the American half is simply forgotten. As a result, owners discover two or three years later that their spouse needed a Form 5471, an FBAR, or a fresh look at the filing status on the 1040.
This guide to employing your spouse therefore covers both sides together. You will find the current 2026/27 thresholds, the commercial-rate test HMRC applies, how the settlements legislation interacts with a salary, and exactly what changes on the US return depending on whether your spouse is American, British, or a dual national. Furthermore, we include a fully worked case study, a step-by-step set-up process, and a decision framework for choosing between a salary, shares, or neither.
Employing Your Spouse: The Short Answer for American Owners
Employing your spouse is lawful and, when the work is real and the pay is commercial, the salary is deductible against UK corporation tax. However, the US effect depends on citizenship. If your spouse is British, the salary mainly helps you by shrinking the profit you would otherwise extract as dividends, which the IRS taxes and which can attract the 3.8% Net Investment Income Tax. If your spouse is American, the salary becomes foreign earned income on their own US return, and new reporting duties may follow.
Who This Guide Is Written For
We wrote this for high-earning American owners of British personal service companies, consultancies, medical practices, property companies and trading businesses. In particular, it suits owners whose company profits sit between £100,000 and £1 million, where the marginal corporation tax rate and the household's dividend tax bands make the choice genuinely valuable. Accordingly, the figures below assume a profitable company and a spouse who can do meaningful work.
The UK Rules for Employing Your Spouse in 2026/27
For employing your spouse, the British framework rests on one statutory test and a handful of payroll thresholds. Get these right and employing your spouse survives an HMRC enquiry; get them wrong and the deduction disappears.
The Wholly and Exclusively Test
A company can deduct a salary only if it is incurred wholly and exclusively for the purposes of its trade, under section 54 of the Corporation Tax Act 2009. For family members, HMRC's own guidance on remuneration paid to friends and relatives makes the practical question clear: would the company pay an unrelated person the same amount for the same work? Consequently, the salary must match the duties, the hours and the market rate. Any excess above a commercial figure is disallowed, and HMRC can argue that the excess is really your own remuneration routed through your spouse.
In practice, we look at three things when we review a client's approach to employing your spouse. First, there must be a written job description that matches what your spouse actually does. Second, the hourly rate must sit within the range a recruiter would quote for that role. Third, there must be evidence, such as emails, timesheets or system logins, that the work happens. Notably, HMRC rarely challenges a modest, well-documented salary; it challenges round sums with no paper trail.
The 2026/27 Payroll Thresholds That Shape the Salary
The official rates and thresholds for employers in 2026 to 2027 set the key numbers. The Lower Earnings Limit is £6,708 a year, the employee Primary Threshold is £12,570, and the employer Secondary Threshold is £5,000. Employer National Insurance is 15% above £5,000, while employee National Insurance is 8% between £12,570 and £50,270. Additionally, the personal allowance remains £12,570.
These thresholds explain the popular "£12,570 salary". At that level, your spouse pays no income tax and no employee National Insurance, and a salary above £6,708 still secures a qualifying year for the UK State Pension. However, the company pays 15% employer National Insurance on the slice above £5,000, which is £1,135.50 on a £12,570 salary, unless the Employment Allowance absorbs it.
Employment Allowance and the Sole Director Trap
The Employment Allowance reduces a company's employer National Insurance bill by up to £10,500 a year. Importantly, a company with only one director cannot claim it if that director is the only employee liable for secondary Class 1 contributions. Therefore, employing your spouse on a salary above £5,000 often unlocks the allowance for the first time, which can wipe out the employer National Insurance on both salaries.
This is the single most overlooked benefit of employing your spouse for American owner-managers. Many run their company as a one-director business paying themselves a salary just above £5,000 to protect their State Pension record, and therefore never qualify. Once a second employee is paid above the Secondary Threshold, the company becomes eligible, and the allowance applies from the date of the claim.
Minimum Wage, Pensions and Payroll Duties
Your company, not you personally, is the employer. Accordingly, we advise clients to pay at least the National Minimum Wage rates for every hour worked, which from April 2026 is £12.71 per hour for workers aged 21 and over. The household-family exemption is drafted around an individual employer and is a weak shield for a limited company. Conversely, a spouse appointed as a director with no employment contract is an office holder, and the minimum wage does not apply to that office alone.
Furthermore, the company must register as an employer, run PAYE through Real Time Information, and assess your spouse for automatic enrolment under the workplace pension duties for employers. Auto-enrolment applies once earnings exceed £10,000 a year. Above all, when employing your spouse, treat them exactly as you would treat any other employee; HMRC gives no family discount on compliance.
Settlements Legislation and Employing Your Spouse
The settlements rules are the reason many advisers worry about family companies. However, they bite on dividends far more often than on salaries, and understanding the difference protects your planning.
Why a Commercial Salary Is Not a Settlement
The settlements legislation in section 624 of ITTOIA 2005 taxes the settlor on income from an arrangement in which they retain an interest, and a spouse counts as the settlor for this purpose. Crucially, a settlement requires an element of bounty, meaning something given away that would not happen in an arm's length deal. A commercial salary for real work contains no bounty. Therefore, employing your spouse at a market rate does not create a settlement.
The risk returns when the salary is inflated. If your spouse earns £45,000 for eight hours a week of filing, the excess above a commercial rate is both non-deductible for the company and potentially taxable on you. HMRC's guidance also notes that where a relative acts as a conduit for the director, the payment can be taxed as the director's own earnings. As a result, an overpaid spouse can produce the worst outcome: a lost deduction plus tax on the wrong person.
Shares Instead of a Salary: the Outright Gift Exemption
Many owners consider giving shares to a spouse rather than a salary. Section 626 of ITTOIA 2005 exempts an outright gift between spouses, provided the property is not wholly or substantially a right to income. The House of Lords confirmed in the Arctic Systems case in 2007 that ordinary shares given to a spouse can fall within this exemption. However, non-voting shares carrying only dividend rights, dividend waivers, and alphabet share classes that switch dividends on and off can fail it.
We cover those traps in detail in our guides to dividend waivers in UK family companies and alphabet shares for American shareholders. In short, employing your spouse on a salary is the simpler and more defensible route when your spouse genuinely works in the business, while shares reward ownership rather than effort.
The US Return When Your Spouse Is British
Most of our clients are American owners married to British spouses. In that case, employing your spouse has no direct US filing consequence for the spouse, because a nonresident alien with no US income files nothing with the IRS. The US effect falls instead on you, through your company's profits and your own dividends.
How the Salary Shrinks Your NCTI Exposure
A UK company wholly owned by a US citizen is a controlled foreign corporation. From 2026, the former GILTI regime is called net CFC tested income, or NCTI, under the One Big Beautiful Bill Act. When employing your spouse, the salary is a deductible expense of the company, so it reduces tested income and earnings and profits pound for pound. Additionally, it reduces the figures you report on Form 5471, as explained in the IRS instructions for Form 5471.
In practice, a profitable UK trading company paying corporation tax at 25% often escapes current NCTI tax altogether, either through the high-tax exclusion election or through a section 962 election, which brings in the 40% deduction and a 90% deemed-paid foreign tax credit described in the IRS instructions for Form 8993. Consequently, the salary rarely saves NCTI tax directly. Instead, its main US benefit appears when profits leave the company.
The Net Investment Income Tax Saving Most Owners Miss
When you extract profit as dividends, the IRS taxes them as qualified dividends under the US-UK treaty. The UK dividend tax rates for 2026/27, published on the GOV.UK dividend tax page, are 10.75%, 35.75% and 39.35%, which normally exceed the US 15% or 20% rate. Therefore, your foreign tax credit usually wipes out the regular US tax on those dividends.
However, the 3.8% Net Investment Income Tax is different. The IRS does not allow the foreign tax credit to reduce it, and for a married American filing separately the threshold is only $125,000 of modified adjusted gross income. As a result, by employing your spouse, every pound you pay them as salary instead of paying yourself as a dividend removes that pound from the 3.8% charge. For a high-earning owner, that is a genuine, permanent saving that no UK-only guide mentions.
The Joint Return Election and Its Hidden Cost
You can elect to treat a British spouse as a US resident and file jointly under section 6013(g), as the IRS guidance on nonresident spouses explains. A joint return doubles the NIIT threshold to $250,000 and widens the tax brackets. Meanwhile, the spouse's salary would appear on the 1040, but their own foreign earned income exclusion would usually remove it.
Nevertheless, the election brings your spouse's entire worldwide income into the US net, including ISA growth, UK funds treated as PFICs, and rental profits. For wealthy households, that cost usually outweighs the saving. Accordingly, when employing your spouse, we model both filing statuses every year before recommending one, and the decision should be revisited whenever the salary changes.
The US Return When Your Spouse Is American
When both spouses are US citizens, employing your spouse creates a second set of American obligations. Each one is manageable, but each one is easy to miss.
The Salary as Foreign Earned Income
A UK salary paid to an American spouse living in Britain is foreign earned income. Your spouse can exclude it using the foreign earned income exclusion, which is $132,900 for 2026, by filing Form 2555 and meeting the bona fide residence or physical presence test. Alternatively, they can claim a foreign tax credit for the UK income tax deducted under PAYE.
Importantly, each spouse's exclusion is personal. A salary does not "double the household exclusion" for your own company profits, because CFC inclusions and dividends are not earned income. Rather, it creates a separate pot of earned income that your spouse can shelter on their own return. For many couples, the credit method is better, because it preserves eligibility for the refundable child tax credit and avoids the stacking rule that pushes other income into higher brackets.
FBAR Signature Authority on the Company Account
If your American spouse can sign on the company's bank accounts, they must report those accounts on an FBAR once the aggregate balance of all their foreign accounts exceeds $10,000 at any point in the year. This applies even though they own no shares. The obligation sits with the FinCEN Report of Foreign Bank and Financial Accounts, and a missed FBAR can carry penalties. Our guide to FBAR signature authority over company accounts covers the detail.
In our experience, this is the most common missed reporting item from employing your spouse, particularly when an American spouse joins a family company as finance manager or company secretary. Consequently, decide at the outset whether your spouse needs bank mandate access at all. If they do, add the accounts to their FBAR and, where the thresholds are met, to Form 8938.
Form 5471 for a Spouse Who Becomes an Officer or Director
A US citizen who is an officer or director of a foreign corporation can be a Category 2 filer of Form 5471 in any year a US person acquires 10% or more of the company's stock. Furthermore, the attribution rules treat stock owned by one spouse as owned by the other for several CFC tests. Therefore, if you appoint your American spouse as a director in the same year you restructure the share capital, check whether they need their own Form 5471. Our professional FBAR and FATCA reporting service reviews this every year.
Social Security and UK National Insurance
Your American spouse employed in Britain by a UK company pays UK National Insurance, not US Social Security tax, because the company is not an American employer. The UK-US totalisation agreement then lets UK contribution years count towards US benefit eligibility where needed. Notably, a salary above the £6,708 Lower Earnings Limit builds a UK State Pension record without any employee National Insurance cost, which is valuable for an American spouse with a short UK work history.
Case Study: Employing Your Spouse in a London Consultancy
The following illustrative example uses realistic figures for 2026/27. Names and details are invented, but the structure mirrors arrangements we prepare returns for every year.
The Starting Position
Daniel is a US citizen living in Surrey and the sole shareholder and director of a UK management consultancy. The company expects taxable profits of £210,000 before any spouse salary. Daniel already draws a salary of £12,570 and dividends large enough to push him into the 39.35% additional dividend band. His wife Claire is British, has no other income, and already handles client onboarding, invoicing and diary management for about 22 hours a week without pay. Daniel files his US return as married filing separately.
The Arrangement and UK Result
After benchmarking practice manager salaries locally, the company employs Claire at £26,000 a year, roughly £22.70 an hour. The company now deducts £26,000, saving corporation tax at the 26.5% marginal rate that applies between £50,000 and £250,000 of profit under the corporation tax rates. That saving is £6,890. Employer National Insurance on Claire's salary is £3,150, but the company now qualifies for the Employment Allowance, so the net employer cost is nil.
Claire pays income tax of £2,686 and employee National Insurance of £1,074.40, leaving her £22,239.60 after tax. By contrast, if the same £26,000 of profit stayed in the company, it would suffer £6,890 of corporation tax, and the remaining £19,110 paid to Daniel as a dividend would cost £7,519.79 in UK dividend tax at 39.35%, leaving £11,590.21.
The US Result and Net Household Gain
On Daniel's US return, the £19,110 dividend would be fully covered by foreign tax credits for regular tax. However, it would also attract the 3.8% NIIT of about £726, because Daniel's income is far above the $125,000 married-filing-separately threshold. Paying Claire instead removes that charge. Daniel's net dividend route therefore leaves about £10,864, while Claire's salary route leaves £22,239.60.
The household is better off by roughly £11,375 a year from employing your spouse on a commercial salary. Additionally, Claire gains a State Pension qualifying year and an auto-enrolment pension. Meanwhile, Claire files nothing with the IRS, and Daniel's Form 5471 simply shows a higher wages line and lower earnings and profits. Had Claire been American, she would have added a Form 2555 or Form 1116 and, if she held bank signing rights, an FBAR.
A Step-by-Step Process for Employing Your Spouse Correctly
We set up every case of employing your spouse in the same order, because doing the steps out of sequence creates gaps that HMRC or the IRS later exploit.
Steps One to Four: Documentation Before the First Payslip
First, write a job description listing the real tasks your spouse performs, with expected weekly hours. Second, benchmark the pay against two or three published market rates for that role and region, and keep the evidence. Third, issue a written contract of employment, signed and dated before work begins. Fourth, record a board minute approving the appointment and salary, which matters more than most owners realise when HMRC asks for contemporaneous evidence.
Steps Five to Eight: Payroll and the Cross-Border Review
Fifth, register the company as an employer, if it is not already registered, and run payroll through RTI. Sixth, claim the Employment Allowance once your spouse is paid above £5,000, and assess them for auto-enrolment. Seventh, keep monthly evidence of work, such as timesheets or email trails. Eighth, before the next US filing season, review the US effect: filing status, FBAR signing rights, Form 5471 categories, and whether a foreign earned income exclusion or credit suits your American spouse better. Our team handles that final step as part of our US tax returns for expats service.
A Decision Framework: Salary, Shares or Neither
Not every family should pursue employing your spouse. We use a simple three-question framework with clients before recommending a structure.
Question One: Does Your Spouse Genuinely Work in the Business?
If the answer is no, employing your spouse is the wrong tool, so stop here. A salary for no work fails the wholly and exclusively test, and paying for childcare or household tasks through the company is not a business expense. Instead, consider whether an outright gift of ordinary shares suits your wider plans, accepting that ownership carries voting rights and divorce consequences.
Question Two: Which Spouse Holds the US Passport?
If your spouse is British, employing your spouse mainly saves UK tax and removes income from your NIIT exposure, with no IRS paperwork for them. If your spouse is American, the salary is still efficient, but you must budget for their Form 2555 or Form 1116, possible FBAR signature reporting, and potential Form 5471 duties. In contrast, if both of you are American, giving your spouse shares can make them a US shareholder of a CFC in their own right, which adds a full Form 5471 and NCTI computation for each of you.
Question Three: What Rate Would an Outsider Command?
Finally, price the role honestly. A salary at the personal allowance suits light administrative work, while a qualified bookkeeper, practice manager or technical specialist can justify much more. Where your spouse's real market value exceeds £50,270, the extra salary meets 40% income tax, and dividends to a lower-earning shareholder spouse may be more efficient. Alternatively, a mix of commercial salary and employer pension contributions often produces the best result for both returns.
Common Mistakes When Employing Your Spouse
Over many years of preparing joint US and UK compliance, we see the same errors repeatedly.
Paying a Round Annual Sum With No Evidence
The classic failure in employing your spouse is a £12,570 salary paid once in March with no contract, no timesheets and no RTI submission during the year. HMRC treats this as profit extraction, not wages. Consequently, the deduction falls away, and penalties for late payroll reporting follow. Pay monthly through payroll from the start.
Forgetting the American Spouse's Own Returns
Many American spouses assume that a modest UK salary needs no US return. However, a US citizen must file once gross income passes the filing threshold for their status, and a married-filing-separately spouse has a threshold of only $5. As a result, missed US tax returns are common in this group, and they become a real problem when the spouse later needs a passport renewal, a mortgage or a sale. Our guide to the close company director tax return boxes shows what both returns should disclose.
Ignoring the Employment Allowance Claim
Finally, some companies employ a spouse but never claim the Employment Allowance, so they pay employer National Insurance needlessly. The claim is made through payroll software and is not automatic. Check it every April.
How TaxYork Can Help
TaxYork prepares US and UK returns together for American business owners, investors and executives in Britain. We review the commercial basis of employing your spouse, run the UK payroll numbers, and then carry the result through to both US returns, including Form 5471, Form 2555, Form 1116, FBAR and Form 8938 where needed. Furthermore, if past years were filed without the spouse's reporting, we prepare the missed US tax returns and missed FBARs in a coordinated catch-up.
Because we prepare both countries' returns, the salary, the dividend and the company accounts tell one consistent story. That consistency is what keeps employing your spouse defensible if either tax authority asks questions.
Conclusion
Employing your spouse in your UK company remains one of the most effective planning steps for an American owner, provided the work is real, the pay is commercial, and the payroll runs properly. In Britain, it saves corporation tax, can unlock the £10,500 Employment Allowance, and uses your spouse's personal allowance and lower bands. In America, it removes profit from your Net Investment Income Tax exposure and, for an American spouse, creates earned income they can shelter with the exclusion or a credit.
Nevertheless, employing your spouse creates US reporting that UK advisers routinely miss, from FBAR signature authority to Form 5471 categories. Therefore, set it up with both returns in view from day one, and review it every year as thresholds and family circumstances change.
Contact Us
If you are considering employing your spouse, or you already do and want both returns checked, book a consultation with our US-UK team. Email hello@taxyork.com or call 020 3488 8606, and we will review your company, your filing status and your spouse's position before the next tax year begins.
Disclaimer
This article provides general information about US and UK tax rules for 2026/27 and does not constitute tax, legal or financial advice for your specific circumstances. Tax law, thresholds and HMRC and IRS practice change frequently, and the case study is illustrative only. You should obtain professional advice tailored to your situation before acting. TaxYork accepts no liability for decisions made on the basis of this article.