Paying Family Members

Why employ a family member?

Provided you bear in mind the points below, the cost of wages paid to a family member will be an allowable deduction from the profits of the business.

It will be tax efficient to employ a family member if:

• You pay tax on the profits of the business and the family member does not have any taxable income, or:
• You pay tax at the 40% or 45% rate and the family member pays tax at 20%.

But it must be real work

This is very important – you must not charge wages to the business unless there is a commercial justification for doing so. The work must justify the pay.

The tax inspector may well ask questions about wages paid to family members, so it is important to be clear about the hours worked, the rate per hour and the duties involved.

If your family member has no other employment income, then you can pay them up to £6,240 per year without having to deduct any tax or NIC or even needing to run a payroll, however, you will need to run a monthly payroll if the amount is above £6,240.

And it must be real pay

It is not enough simply to make an entry in the books for the wages – the family member must actually be paid, preferably by cheque or direct debit into their personal bank account. This provides an audit trail if HMRC raise any query.

However, please note that the wages should not be paid into a joint account. It could be argued that the taxpayer has not really paid the family member as the tax payer still has access to the money.

It is also suggested that the wages are paid monthly.

You could pay pension contributions instead

Some of our clients make pension contributions in place of wages for a spouse or civil partner who has worked in their business. As well as reducing a household’s tax bill this can help provide a pension for a non-working spouse or civil partner.

A simple example

Dr Ali does some medical reports from his home. His 18-year-old son helps him out for five hours a week at £10.00 per hour, earning a total of £50 per week. This amount equates to £2,400 a year, assuming four weeks’ break.

Dr Ali can offset the £2,400 he pays his son against his profits for income tax purposes.

Provided his son has no other income, he does not have to pay any tax on the money because he falls well below the annual tax-free personal allowance (£11,500 in 2017/18).

If Dr Ali had done the work himself instead and not employed his son, that £2,400 would remain part of his taxable profits for the year and he would be liable to pay tax on it. If he was liable to income tax at the higher rate of income tax of 40%, the household would have received only £1,440 (£2,400 less 40%) instead of the full £2,400. National Insurance contributions may reduce the household income even further.