I have a job in the UK where I am in the 40% tax band. I have the opportunity do some freelance work (web site building) in my spare time. My wife does not work. Could I set my wife up as a sole trader and use her company to invoice for the work. She could then declare the income on her tax return. As she has no other earnings the tax we will pay would be reduced. I am allowed to work for free for her?
My understanding (I am not a lawyer or tax expert) is that you are not allowed to work for free, but you can pay yourself minimum wage for the hours worked. There are probably National Insurance implications as well but I don't know.
The main thing is, though, that if HMRC think that you've set up this system as a tax avoidance scheme then they're allowed to tax you as though all the income had been yours in the first place.
If you are considering such a setup I would strongly advise you to hire a qualified small business accountant who will be familiar with the rules and will be able to advise you on what is and is not possible / sensible. Falling outside the rules (even inadvertently) leaves you liable to a lot of hassle and potentially fines etc.
In the US, you'd run the risk of being accused of fraud if this weren't set up properly. It would only be proper if your wife could show that she were involved, acting as your agent, bookkeeper, etc. Even so, to suggest that your time is billed at one rate but you are only paid a tiny fraction of that is still a high risk alert.
I believe the expression "if it quacks like a duck..." is pretty universal. If not, I'll edit in a clarification.
note -I know OP is in UK, but I imagine tax collection is pretty similar in this regard.
Depending on how much freelance work we're talking about you could set up a limited company, with you and your wife as directors.
By invoicing all your work through the limited company (which could have many other benefits for you, an accountant/advisor would... well, advise...) it's the company earning the money, not you or her personally.
You can then pay your wife up to £10,000 per year (as of writing this) without income tax kicking in. You would probably have to pay yourself a small amount to minimise exposure to HMRC's snooping, but possibly not... as far as I'm aware the rules do not state anything about working for free, for yourself - and I wouldn't worry about the ethics, you're already paying plenty into HMRC's bank account through your day job!
Some good information here if you're interested: