EMPLOYING FAMILY MEMBERS
There are some advantages of employing family members, where a family member with no other income is employed; there is a clear tax advantage if that member does not exceed the personal allowance for the year, since business profits will be reduced with no tax liability arising on the individual.
This is in no way tax avoidance, just acknowledgment of the contribution to the business. Where the family member is paid between the current lower earnings limit £4,680 and NIC threshold of £5,435, this entitles them to a number of benefits, including Statutory Sick Pay.
This must be genuine and the pay realistic. In cases where HMRC deems the remuneration paid to a family member to be excessive, liability to tax may arise under the settlements legislation. In other instances where HMRC may deem payments to be excessive although wholly and exclusively paid for the purpose of trade, this remuneration may be taxable on the business proprietor or director of the company.
The level of remuneration considered is laid out in the HMRC Business Income Manual at BIM47105 and BIM47106. The first issue to overcome is the proposed pay compared to the salary paid to a non-family person on a commercial basis. In many cases there will be no other employee, so the comparison is irrelevant.
The payment of the salary or wage must actually be paid to the family member and preferably into a separate bank account not a joint account. It is desirable that a PAYE scheme is set up for one or more family members who are paid by the business as it will provide evidence for NI purposes where no tax or NIC is actually payable.
In paying any family member the business must observe the terms of the National Minimum Wage. For adults aged 22 and over the current rate is £5.73 an hour. For those aged 18-21 the current rate is £4.77. If the business may wish to employ children of the family on a part-time bases the minimum wage for 16-17 year olds is £3.53 an hour.
Contracts of employment should be provided for any family member employed; apart from employment law considerations, this procedure validates the business relationship. In a few cases the family member can provide their services on a self-employed basis, this is possible where the individual has their own self-employed business and provides services on a contract basis.
Another useful device is payment of pension contribution for employed family members, especially if they otherwise would pay tax or suffer National Insurance contributions.
If you would like to discuss employing a family member or anything else please do not hesitate to contact us.
