Tax for Family Businesses
It’s estimated that more than half of small businesses in the UK are run as family-owned businesses. As a family business ourselves it doesn’t surprise us, and we understand first-hand the benefits that come with turning to family members when you’re in need of an extra pair of hands to keep the business going. Whilst there can be some tax benefits, there certainly are many tax rules. Take a look below if you’re considering hiring family members as employees.
The tax rules when employing your partner or spouse for a family business –
Regardless of whether you operate your business as a sole trader or limited company, you are allowed to employ your partner or spouse as an employee for your business. You must pay them at least the national minimum wage which, for the tax year 2022/23, is £9.50 for those aged 23 and over. Whilst there is no maximum salary, you must be seen to be paying them a fair and proportionate salary for their job role. There is no set guidance on amounts, but the general approach HMRC will take is, whether you would pay the same amount to a person who is not a family member and completing the same tasks. For example, it may be considered excessive to pay your partner £50 per hour for filing and shredding paperwork if this is something you would not be prepared to pay another person for. In addition to their salary you will also need to pay national insurance if they earn at least £242 per week.
The tax benefits of employing your partner or spouse –
Whenever you pay a salary for any employee, regardless of whether they are a family member or not, this is a deductible expense against your business profits which will allow you to reduce your profits. You may also become eligible for Employment Allowance, which will allow you to claim up to a maximum of £5,000 (for tax year 2022/23) for Class 1 National Insurance that you’ve paid as a result of hiring an employee. Again, Employment Allowance is not just available for family businesses but any business which employs staff.
Employing a partner or spouse can be a good way to utilise their personal tax allowance if they are not currently making full use of it. It means they are able to earn up to £12,570 in a year without having to pay tax on their earnings. This would then contribute to your shared household income as opposed to paying someone external where you would receive no benefit of their tax allowance.
The tax benefit of appointing your partner or spouse as a director of your business –
If your business operates as a limited company then you can employ your partner or spouse as an employee, appoint them as a director or make them a shareholder. You can choose to do only one, a combination out of the three, or all three. However, shareholders of a business are entitled to certain benefits which employees and directors are not – specifically the right to receive dividend payments. Dividends are taxed at a lower rate than income tax, and in addition to your personal tax allowance, shareholders are allowed to receive £2,000 tax-free in dividend payments. For more information on the benefits of splitting income between a salary and dividends read our article on The Difference between Director’s Salary and Dividends.
The tax rules when employing your children for a family business –
When you are employing your own child to work for your business you need to ensure that you are adhering to UK employment law. If your child is at least 16 (the UK’s school leaving age) then you will need to make sure they are receiving at least the national minimum wage unless they are employed as an apprentice. For any children under the age of 16 you should follow the general rule that their pay should be reasonable for the work they are carrying out.
Children under the age of 16 are also not required to pay National Insurance. You will not need to add them to your payroll unless their total income is over the personal tax allowance which is currently £12,570. For children over the age of 16 they should be added to your payroll and National Insurance deductions will need to be made if they are earning over the threshold (£170 per week or £737 per month).
The tax benefit when employing your children –
There is no unique tax benefit when employing your own children as opposed to any other family member. As with the rules above, you’ll be able to deduct their salary from your profits to reduce your profits and you’ll be able to claim back national insurance payments through Employment Allowance where your child is over 16 and earning above the threshold.
The tax benefit when employing your child who is a freelancer –
This is only likely to be applicable to children over the age of 16. For example, if your child is a talented artist, there is no reason why they could not legitimately set up their own business as a freelance graphic designer. From your own business you would then be able to pay them for their services. This cost can be deducted against your profits and you would not need to pay national insurance as you would do if they were an employee earning above the threshold. They would be subject to income tax on profits earned but would be able to earn up to £12,570 tax-free. However, under these circumstances there is one important factor to take note of and that is their employment status. They would need to be able to prove that they are a genuine freelancer in order to not fall into the scope of IR35.
A summary on general advice for employing family members for your family business –
There are many considerations to make when deciding whether you want to involve family in your business. When it comes to your tax liability the most important point to take away from this article is to ensure that you are paying at least the national minimum age where the family member is over the age of 16; however not to over-inflate their salary so that it does not seem reasonable. Take note of the national insurance which can be claimed back through Employer Allowance up to £4,000 per year. For those over school leaving age you will need to include them onto your payroll and in some instances you will also need to remember that auto-enrolment makes it a legal obligation to provide employees with a workplace pension. To ensure your payroll is done correctly feel free to take a look at our Payroll service page.
This page has been written by Jamie Hill, Marketing Assistant