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Is employing family a good tax-saving strategy?

Many small business owners like to keep things in the family, because working with family can be comfortable and fun. After all, you’re more likely to trust a family member than a stranger.

Another benefit of adding a family member to your payroll is the potential to reduce business taxes. Paying a salary to any employee – regardless of their relation to you – is a deductible expense.

This means that turning a family member into a salaried employee could help to reduce your declarable profits, and therefore the amount of tax due on your business income.

There are no rules against hiring family members to work for your privately owned business, but it’s important to pay attention to employment laws and taxes that still apply.

Let’s look into the tax implications of employing a family member and what your legal duties would be as their employer, so you don’t accidentally break the law.

Can you employ family members to reduce taxes?

Yes, you can. If you own a private small business, there are no laws against nepotism (hiring family and friends) – it’s not like it’s a significant public or governmental role.

Your family member doesn’t even have to apply through the usual channels – i.e. responding to a job listing, attending an interview, etc. You can simply create a role and hire them.

However, the job has to be a legitimate role that fulfils a necessary function. For example, employing your spouse as a receptionist, or hiring your teenage child to do some admin.

If your partner is otherwise unemployed or isn’t earning enough to pay Income Tax, this is a good way of using their annual tax-free Personal Allowance (£12,570).

This tax-free income will then join your household income pool to support your family, whereas you wouldn’t benefit from hiring an external employee.

Everything needs to be above board, so any relatives you employ must be registered on your payroll so HMRC can tax their salary appropriately through PAYE.

There should be no special treatment regarding pay or working conditions, and you must still make National Insurance and pension contributions as necessary.

Don’t forget that you’ll also need to have employer’s liability insurance that covers your family employees, and follow all health and safety and employment regulations.

If your business is a limited company, you also have the option of employing an adult relative as a director or shareholder to receive further benefits, such as less-taxed dividends.

Can a family business employ children?

Yes, the owner of a small business is free to employ their child or multiple young family members if they wish – in compliance with the UK’s child labour laws, of course.

Whether you pay them for ad hoc services as a freelancer or take them on board as a part-time or full-time employee, you must pay them an appropriate wage for the work they’re doing.

You can hire a child as young as 13, or an ‘adult worker’ who is 18 years old or above. If the child is at least 16 years old and living outside the family home, they’ll be eligible for earning the National Minimum Wage and may have to start paying National Insurance contributions.

The minimum wage depends on their age, as it rises at 18, 21, and 23. There’s also a separate minimum wage for apprentices under 19 years old or for those in the first year of their apprenticeship.

Children between these ages may be less likely to use all of their Personal Allowance, especially if they’re primarily a part-time or full-time student. Just remember that different rules around wages and working hours apply for ‘young workers’ (under 18) and ‘adult workers’ (18 or over).

How much should a business pay family employees?

Regardless of your relationship to any of your employees, you should be paying each of them the appropriate wages for their role, and paying workers equally for performing the same role.

To benefit from reduced taxes, you must enroll related employees through PAYE. Trying to sneak ‘cash in hand’ payments could be considered tax evasion by HMRC, and you could be fined.

HMRC has no reason to disallow valid deductions, such as paying the ‘going rate’ for genuine work that your family member has done for the business – what HMRC calls ‘equal pay for equal value’.

This obviously depends on the job and the individual’s skill set, but it must add value to the way the business functions – such as billable hours of cleaning, maintenance, bookkeeping, or marketing.

You’ll need to pay their wages into their bank accounts through your payroll system and keep records of these payments, as well as any commission or bonus payments.

If the pay for a family member is unrealistically high for the job in question, such as £100 an hour for answering the telephones, HMRC would consider this to contribute to your personal income as the business owner, which would reduce your deductible expenses and affect your own tax liabilities.

In such a case, you also wouldn’t be able to claim National Insurance contributions relief. If you’re paying a family member a fair wage to work for your business and they earn above the Employment Allowance threshold (currently £120 per week or £560 per calendar month), you could claim back up to £4,000 of National Insurance liability and reduce your business taxes even further that way.

Where to find advice on employing family members?

In summary, creating a job within your private business and employing a family member to fulfil the role can be a tax-efficient way of keeping more cash in the family’s coffers – but only if you do it right and stay on the good side of the law. You can find more information about HMRC’s salary rules for close relatives and dependents here.

This kind of salary arrangement will be more beneficial if you put it in motion at the start of a tax year, so it’s a good time to consider hiring a family member for April 2022–2023. If you need help with setting up payroll services or account management, or you’d simply like some tax advice, please contact the experts at GBAC today.

Give our team call on 01226 298 298 to discuss how we can help you, or send your enquiry by email to info@gbac.co.uk and we’ll be in touch as soon as possible. We’re happy to provide guidance on employing family members and tax deductions as part of our comprehensive services as accountants in Barnsley.