Can I employ a member of my family and how tax efficient is it?
Posted on 14th May 2022
In short, a business IS allowed to employ a family member of the business owner. In the main, this is very beneficial for the business. That said the family member should be treated just like any other employee which means there are rules and regulations which must be adhered to.
This article will outline the main benefits of employing a member of your family in the business and highlight some of the possible pitfalls which need to be avoided.
TIME BENEFIT FOR YOUR BUSINESS
As the business owner, it’s important that you spend as much time as possible ‘working on the business’ to develop it and increase the sales and profit.
One way to maximise the amount of time to do this is get someone else to do the day-to day tasks. Those day-to-day tasks which need to be done, but not by you, typically include:-
- Answering the telephone
- Raising/filing and paperwork (including invoices)
- Ringing customer to chase payment or confirm project start dates
- Ringing suppliers for delivery of materials
- Conducting market research
- Keeping the website or social media up to date
- Help out on-site and be a ‘second pair of hands’
To do this there are 4 options….
Option 1: Employ a family member. This is often the preferred option for those business owners who are lucky enough to have a family member who wants to get involved. The reason being is that it saves the business owner a lot of time, cost and hassle of finding someone.
Option 2: Recruit a member of staff who can do the day-to-day tasks for you.
Option 3: Automate the tasks. If, for example, the accounting software is set up to automatically collect payment for a sales invoice on the due date then the task of ringing the customer to chase payment disappears.
Option 4: Outsource the tasks. So, for instance, you could stop being distracted by inbound phone calls by arranging for all of them to be picked up by a telephone answering company.
TAX BENEFITS FOR YOUR BUSINESS
The biggest benefit for many business owners of employing members of your own family is that it saves tax and reduces the annual tax bill.
The biggest tax savings are likely to arise if the family member you employ has either little or no other sources of income.
The possible tax savings explained
By earning an income from your business….
- Allows the family member to use all their tax-free annual personal tax allowances. That means the salary you pay uses up the unused portion of this allowance…. resulting in no tax (either income tax or national insurance) being paid.
- Allows your business to claim their salary as an allowable expense. That extra cost reduces the profits of the business and thus reduces the tax.
A limited company, at current tax rates, will save 19% of whatever salary is paid.
For a sole trader the possible tax savings will largely depend on their annual income but they are likely to range from 9% up to 42%.
Janet’s 19-year-old daughter Rebecca earns £5,720 a year (based on 11 hours a week at £10 per hour) by helping in Janet’s marketing limited company. Her daughter has no other income.
- Rebecca doesn’t pay tax on any of the £5,720 salary. At this amount, she earns is less than the tax thresholds over which income tax and national insurance is payable and therefore keeps the entire amount.
- Janet’s limited company saves £1,087 corporation tax (based on 19% of £5,720).
And for limited companies…. trivial gifts can be claimed
You probably know that up to £300 of gifts (HMRC calls them ‘trivial gifts’) can be bought each year for any director or company secretary of a limited company.
What most business owners don’t know is that a family member of a director AND who is on the payroll of the same limited company can ALSO get £300 of trivial gifts!
The annual cost of the trivial gifts is a tax-deductible expense and thus saving corporation tax.
There are a few rules relating to Trivial Gifts so ask your accountant to clarify them so that you don’t miss out on this tax saving.
1 Must be a genuine job
The job done by your family member must be a real job with real work being done. That means it must add value to the business or fill a legitimate need. It can’t be contrived (i.e. ‘made up’).
It doesn’t matter if the job hasn’t existed before. The critical bit is that by creating the job which is done by your family member the business runs more smoothly than it did before.
2 The rate of pay must be both commercial & reasonable
When it comes to rates of pay a family member must be treated in the same way any other employee would. That means the hourly rate of pay must be not too dissimilar to what you pay anyone else to do exactly the same role.
For instance, it’s NOT commercial and NOT reasonable to pay a teenage son/daughter £200 an hour to do a bit of photocopying and filing.
Also, bear in mind that the hourly rate of pay can vary. After all you’d expect to pay a much higher hourly rate for someone to build a website compared to doing the filing and cleaning.
TIP : It’s a good idea, before employing a family member, to create a record of the tasks they will do, how many hours a week it will take and what the rate of pay is. By doing this all before the job starts means that you have evidence to justify to HMRC what you have done if they were to ever query it.
3 The rate of pay must NOT be lower than the national minimum wage
A business has certain legal obligations to every one of its’ employees. One of those is to pay at least the National Minimum Wage (NMW). The NMW means that every employee is paid a minimum hourly rate of pay and that rate will vary depending on an employee’s age.
To comply with NMW the family member’s hourly rate must be same or more than the NMW for their age.
4 Abide by the law & regulations
There are by-laws that either ban certain types of employment for children below compulsory school-leaving age OR which restrict working hours and/or working times.
From the age of 13 children are allowed to work part-time in business BUT it must be ‘light work’ AND doesn’t endanger their health and safety or interfere with their education.
From the age of 16 children are allowed to work full-time, BUT must continue to participate in education or training until they reach the age of 18.
Local authorities often have their own rules. IF you’re considering involving your children in the business it’s worth researching what the rules are in your area and make sure you tick the right boxes.
5 On the payroll & paying the money
As mentioned above, your family member must be treated just like any other employee. That means they must be included on the payroll and their pay paid.
Employing family members can be a massive help.
It creates more time for the business owner to work on the business and to grow it.
It also helps to maximize tax efficiency and reduces the family’s annual tax bill.
But before rushing off to recruit family members just beware of the various pitfalls highlighted above which need to be carefully avoided.
Not all accountants are the same but a good one will give you the right advice on this so that you benefit from the tax savings and avoid the many pitfalls.
If you’d like to discuss how we can help then call one of the team on 0161 410 0020 or email email@example.com.