If you run your own business, it’s tempting to bring in your own family into the company. But it’s important to think through both the positive and negative implications of employing your family.
Employing your own family members can help to reduce the overall tax bill for the whole family unit. And, as an added bonus, some tax-effective benefits (such as having a work mobile phone) can be provided to employees but not to non-employed family members.
But there are other implications to take into account before you make a decision.
Creating a genuine business role for your family member
If members of your immediate family have no other source of income, you might want to think about employing them within a family business. This allows them to utilise their tax allowances against pay, while the salary itself becomes an allowable expense against the company’s profits.
There are conditions and rules to abide by, however:
- The job you offer your family member has to be a real role. So, although a job can be ‘created’, in the sense of not having existed before, it must add value to the business or fill a legitimate need. For example, if you’ve never employed a receptionist but your business would run more smoothly with one, you can create the role and employ your spouse or one of your adult children.
- The role must be genuine and the pay you offer your new employee has to be commercially reasonable too. As such, if you decided to pay your spouse £125/hour to work one hour a week covering the office telephones, this idea would fail on both counts.
- Presuming it’s a real job, with a reasonable salary, then the pay would need to be recorded in your normal payroll system, tax and National Insurance calculated as for anyone else, and the net pay actually paid over.
- In most circumstances, children under 13 can’t be employed even on a part-time basis. But children aged 13 and over can be employed on a part-time basis, subject to local authority regulations. An employment permit will need to be obtained from the relevant local authority if you plan to do this.
- There are by-laws prohibiting certain types of employment for children below compulsory school-leaving age, and restricting both working hours and working times. So, it’s a good idea to do your research and make sure you’re ticking the right boxes. As with adult family members, the job you offer a child must be real and the pay commercially realistic.
- Where any pay offered is unrealistically high, or the job is clearly contrived, any salary paid may be treated as earnings of the business owner, which could impact on your own income tax liabilities.
Talk to us about employing your family
If employing your nearest and dearest and creating a family-run business is on the cards, please come and talk to us. We can discuss your plans for taking on family members in the business, and making sure that they’re paid correctly and efficiently.
We can also help you work out any tax benefits that may arise from employing members of your family in the business.