Spouse Partnerships: Save on Tax

Your little side hustle has suddenly grown up. What started as a few freelance jobs is now bringing in real money — and a real tax bill. Naturally, you’re wondering…

“Can I reduce the tax by splitting the income with my spouse?”

Great question. Let’s break it down.

Income Splitting: The Classic Tax Strategy

Splitting income with your spouse or civil partner is one of the oldest — and most popular — forms of tax planning. But HMRC doesn’t love it when it’s done the wrong way:

❌ Paying your spouse a salary for doing nothing

❌ Allocating them most of the dividends when they don’t own the shares

These setups tend to get HMRC’s attention.

But there is one structure HMRC rarely attacks…

Why Partnerships Get a Green Light

In English law, a partnership is formed simply by two people agreeing to share profits. That’s it. No Companies House forms. No magic rituals. Just shared profits.

And because it’s so simple, HMRC finds it extremely difficult to challenge a genuine partnership.

In fact, their own guidance admits:

“A partnership is not a sham merely because it is set up to save tax.”

That’s about as close to a thumbs-up as you’ll ever get from HMRC.

Brian’s Tip:

Always create a proper written partnership agreement. It formalises everything and makes HMRC challenges far less likely.

But… What About Splitting Profits Purely to Save Tax?

Surprisingly, HMRC is still relaxed here.

Their guidance confirms that:

• A spouse can be taken into partnership mainly for tax reasons

• HMRC cannot challenge how profits are shared

• They cannot apply a “value of work done” test like they can with wages

In other words — if your spouse is a partner, the profit split is largely up to you.

The One Catch: The Settlements Legislation

This is HMRC’s back-up weapon.

If your spouse is only entitled to income (their share of profit) but not a share of the capital assets — goodwill, equipment, the client base, etc. — HMRC can treat their profit as yours and block the tax saving.

Brian’s Tip:

Make sure your partnership agreement clearly states that both partners are entitled to a share of income and capital.

Do that, and you’re protected.

Beware of Loss Restriction Rules

If your spouse isn’t very active in the business, HMRC may restrict how much loss relief they can claim personally. This doesn’t stop your partnership from working — it just limits losses.

A minor point, but worth noting.

So, Should You Form a Partnership to Split Income?

If:

✔ You’re genuinely working together (even lightly),

✔ You create a proper partnership agreement, and✔ Both of you are entitled to income and capital…

…then yes — this can be a very tax-efficient way to share income and keep more of what you earn as a family.

Want to know exactly how much you could save?

Ask Brian and try the income splitting calculator.