Divorce and Self-Employment: How Income Is Assessed by the Court

Self-employment adds a layer of complexity to divorce financial proceedings that does not exist where both parties are in straightforward employment. When one spouse runs their own business or works for themselves, establishing a true and fair picture of their income requires more investigation than simply looking at payslips.

Why self-employed income is harder to assess

For an employed person, income is relatively straightforward to establish from payslips, P60s, and bank statements. For someone who is self-employed, the picture is more complex. Earnings can vary significantly from year to year. The line between personal income and business expenses is not always clear. There may be scope to structure income in ways that affect how it appears on paper.

Courts are aware of this complexity and have developed approaches for dealing with it. Simply accepting the income declared in tax returns at face value is not always the end of the analysis, particularly where there are concerns about how income has been presented.

What the court looks at

In cases involving self-employed income, the court will typically want to review several years of accounts and tax returns, often three to five years, to establish an average picture of earnings. This helps account for natural fluctuation in business income and prevents a particularly good or bad year from distorting the picture.

Business bank statements, company accounts, and any accountant's reports or management accounts will all be relevant. Where the business has retained profits that could be extracted, or where there are concerns that income has been suppressed, a forensic accountant may be needed to provide an independent assessment.

Our family law barristers can advise on whether expert accountancy evidence is likely to be necessary in your case.

Director and shareholder income

A particular issue arises where the self-employed party is the director and shareholder of their own company. In this structure, income is often taken as a combination of salary and dividends. The salary component may be set at an artificially low level, with the majority of income taken as dividends only when it is tax-efficient to do so.

The court will look at the total income drawn from the business, including both salary and dividends, when assessing income for the purposes of maintenance and general financial assessment. Where retained profits are sitting within the company, the court may also consider whether those profits are accessible and how they should be treated.

When income is genuinely variable

Some self-employed individuals have genuinely variable income that is difficult to predict. Freelancers, contractors, and those whose work depends on market conditions may have years of significantly different earnings. In these cases, the court tends to average income over a period of years and may also consider what the individual is capable of earning rather than what they have actually earned in any given year.

If a self-employed party claims that their income has dropped significantly in the period around the divorce, the court may scrutinise that carefully. A sudden decline in declared income around the time of proceedings is something that courts take seriously.

The business as an asset

Beyond income, the business itself may be a significant capital asset. The value of a business built during the marriage is likely to be treated as part of the matrimonial pot. A formal business valuation will often be needed, and the method of valuation can make a significant difference to the overall financial settlement.

Getting early specialist advice on how self-employed income and business assets are likely to be treated in your case is essential. The earlier this is understood, the better placed you are to make decisions about settlement.

You can read more about what early advice covers in our guide to using a direct access barrister for divorce.

A direct access barrister can give you a clearer picture of where you stand, our team can get you a quote for advice from a barrister. Contact us to discuss your situation.