Running your own business frequently means multi tasking, and one effective method of gaining support is by employing a family member in your business. Whether you operate your business as a sole trader, partnership, or limited company, bringing a spouse, civil partner, or other relatives on board can be a practical and tax-effective decision. However, it is crucial to ensure that everything is implemented and complied with correctly, with clear justification for every payment made.
Overview - Pay and Fair Remuneration
As we've previously discussed gifting shares to your family, when they work in your business, we'll now focus on those tax issues when you pay them a salary as a n employee.
When employing a family member in your business, you must pay at the National Minimum Wage (NMW) or the National Living Wage (NLW) as a minimum. Furthermore, HMRC will challenge pay rates to family members if they consider the expense is not wholly and exclusively incurred for business purposes.
This means that wages should reflect the actual value of any work performed and considered reasonable under the ‘arm’s length principle’.
Justifying a higher than average wage to a family member
Where a family member receives a higher wage than a non-family employee might, you must have valid reasons for it.
For example, you rely more heavily on their diligence, flexibility, or trustworthiness as an employee. Additionally, they might be available to work longer hours or discuss business matters outside of the usual working hours.
All of these factors can justify paying a relative higher than the market rate. However, it's important these arrangements are properly documented.
Planning points
They'll be different factors to consider, depending on which family member you are employing in your business.
Spouse/Civil partner working in the business
Before deciding to employ your spouse, it is worth considering whether they should be treated as an employee or as a partner in your business. However, for sole traders, once wages exceed the personal allowance threshold, the tax savings are eroded because of the additional income tax and NIC liabilities.
Always ensure that any wages paid for work carried out and are clearly defined in a written employment contract. HMRC will expect to see an employment agreement that outlines duties, hours, and pay. HMRC will tend not to challenge wages if PAYE and NICs have been applied in full under a contract of employment.
Furthermore, a formal employment contract is especially useful if you need to prove it's a legitimate arrangement. However this is less important where your spouse/civil partner is a director of your company as directors of small private companies are generally not bound by NMW/NLW legislation.
When employing a family member in your business, you must pay their wages directly into their personal bank account, not into a joint account. What's more, payments should be made at regular intervals. Additionally, records should be kept to show that work was genuinely performed.
You can include additional benefits as part of a remuneration package, provided they are reasonable. For example, pension contributions, mobile phones.
Employing your children and younger family members
The same principles apply when your employing children or younger relatives. Wages must be appropriate for the work performed, and any payments deemed excessive may be disallowed by HMRC.
Additionally, if your children are still at school, you'll face additional legal restrictions on the type of work they can do plus working hours
Furthermore, if your children receive a wage but don't carry out the work, HMRC may apply the settlement provisions .As a result the expense for their wages will be taxable on you as their parent.
Therefore, it's important your children genuinely carry out tasks for your business, and their employment must comply fully with employment legislation and PAYE obligations.
There is no reason why your children shouldn't receive a smart phone from you as their employer. Although only if another employee might also be provided with one in similar circumstances. .
However, they must be an employee and undertaking work for your business.
Equally importantly, any employment benefits included as part of their package must be made on an arm’s length basis.
Summary
When employing a family member in your business, proper documentation, and compliance with HMRC rules are essential. The benefits can be substantial - ranging from trusted support to potential tax efficiencies.
However. they come with responsibilities. Always ensure that pay can be justified, contracts are in place, and records are accurate. What's more, reviewing these arrangements regularly maintains compliance and ensures your family employment strategy remains beneficial for both your business and your family.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.