If you run a family business you should make sure you are maximizing the opportunities for tax relief. One smart way to do this is pay a salary to your spouse, partner or adult children in return for the help they give you with your business.
Not only does this increase your cash withdrawal and cut your tax bill, but it also gives your family employee National Insurance Contributions that count towards their state pension entitlement.
It is essential, however, to tread the legal requirements carefully and stay in HMRC’s good books. Read on to find out more about how to manage family members on your payroll, starting by answering a very simple question:
Who is a family member, and what kind of salary can they earn in the UK?
A spouse or other family member who carries out business-related admin tasks such as bookkeeping, distributing payslips, and answering phone calls can be paid a salary.
It is important to pay them a realistic and fair salary in exactly the same way as you would pay any employee doing the same tasks.
Just like other salaries, the salary you pay your family member must come under PAYE and have NI and tax deducted before it goes out.
For this purpose, a family member can be defined as anyone dependent on the business owner for financial support, including elderly relatives or long-serving domestic help.
What is the minimum wage that you can pay to your UK family members?
If a family member lives in the family home and works for the business, they will not qualify for the national minimum wage provisions. However, a family member who works for the company while living elsewhere (such as an adult child at university) should be paid at least the minimum wage. Generally speaking, payments should be commensurate with the hours worked and the effort put in.
In the UK, the national minimum wage (national living wage) at the moment (August 2022) is £9.50 per hour for workers aged 25 and over.
What does it mean to be eligible for a tax deduction in the UK?
In general, as long as the business owner is paying the family member for work actually done, and the payment is in a realistic range, there would not be any problem claiming a tax deduction for it. However, there should be a clear link between the payment and the work performed.
For instance, if a business owner claims a deduction for ‘provision of goods’ to her son at university, but the bulk of the money was spent on food and drink expenses, the tribunal will likely declare the payments as born out of ‘natural love and affection’ rather than a business expense.
For this reason, it is vital to maintain proper records of all payments to family members to showcase the items eligible for a tax deduction ethically.
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What are the personal allowances and NICs allowed in the UK?
In 2022/23, the annual personal tax allowance per individual (children and adults) is £12,570. As a business owner, you should take advantage of this as much as possible when distributing income to your family members. In addition, remember that the primary NIC threshold is £184 per week. If your family member is earning more than that, you need to pay a NIC of 13.8%.
Can a family member be a shareholder in the UK?
Since dividends are taxed at a lower rate than salaries, a business owner might want to appoint the family member as a shareholder and pay them a dividend instead of a paycheck. We can compare the tax burden for each case as follows.
Let us say a spouse gets paid £35,000 as salary. Then the tax burden would be £4,486.
Now let us say the spouse gets paid £35,000 as a dividend. Then the tax burden is as follows:
What about pensions for family members in the UK?
You might want to consider whether your family member is eligible for a workplace pension scheme. Tax relief is available on pension payments, making pensions one of the most tax-efficient investment options available to you.
Over to you
If you employ a family member, you must operate PAYE and pay them after deducting tax and NI – provided they earn a specific figure. Hopefully, you now have some clarity on the basics of paying a salary to the family members contributing to your business.
And for more detailed insights, we recommend talking to a professional accountant so that you are always on the right side of the law. It would help if you did not take any risks when it comes to paying your employees right – whether they are your own family or not.
If you are a London-based business needing advice on putting family members on the payroll or other small business tax tips, contact Bradleys Accountants on 020-8303-1287 or contact us by filling the form to arrange a no-obligation meeting with us.