Many small business owners in the UK employ their spouse to help with the running of their business. Although some spouses are reportedly volunteers and as such unpaid, the question remains – does HMRC object to actually putting family members on the payroll?
Claiming a tax deduction
According to HMRC, when you run a limited company, a business expense is only allowed if it:
- Isn’t capital expenditure
- Isn’t specifically non-allowable
- Is wholly and exclusively for business purposes
That last point is key. The business expenses you claim for must be “wholly and exclusively for business purposes”, otherwise they will not qualify for a deduction. For this reason, paying a non-business family expense through your company will not make it tax deductible.
That’s the bad news. The good news, however, is much more positive and will even result in your company getting something out of the arrangement – with your family member gaining relevant work experience alongside the satisfaction of getting a fair wage for a job well done.
Family ties are irrelevant
One crucial point to note is that HMRC deems your family ties to be entirely irrelevant when it comes to who is placed on your payroll. For this reason, employing a member of your family to help them bulk up their CV, for example, is allowed, as this advantage would come to anybody you employed within your company, regardless of any family connection.
What HMRC is very much interested in, on the other hand, is what your company gets out of the arrangement. In this situation, it’s HMRC’s job to ensure any family member you employ is only being paid a wage appropriate to the job they are being employed to do; equal pay for equal value. There must be no special treatment paid to your family member through an inflated salary, reduced working hours, or anything else that falls outside of the “equal pay for equal value” ideal.
Creating work for a family member
Many business owners incorrectly believe they can only employ a family member within their company if they apply through the correct channels of communication for a job that is already available.
This isn’t the case at all. It’s entirely legal for you to create a job for your family member so long as the work serves a necessary function in your company. For example, if you’ve been considering employing a receptionist for some time but haven’t got around to it, employing your spouse in this role would be perfectly acceptable. However, if you already have a receptionist who can currently handle their workload, to employ your spouse or any other family member as a second receptionist wouldn’t serve a necessary function in your company and could raise eyebrows at HMRC.
The same applies to employing your teenage son as your office cleaner, or your sister as an office administrator. So long as these extra bodies serve a necessary function, HMRC will have no issue with you employing them and placing them on your payroll, the same way you would any other employee in your company (a full list of the payroll information you need to report to HMRC can be found here). They will, however, check whether you are actually paying the money. Keeping the money and claiming it stays within the family won’t fly.
It’s also important to note that there are restrictions on working hours, work breaks and types of work when you hire a family member who is under the minimum school leaving age.
Thinking about putting family members on the payroll?
If you’re a London-based business in need of further advice about putting family members on the payroll, or other small business tax tips, contact Tax Agility’s small business accountants on 020 8108 0090, or get in touch with us via our contact page to arrange a complimentary no obligation meeting. We’re London’s local accountants serving clients throughout the city with particular focus on Putney, Wimbledon, Fulham, Richmond, Hammersmith and Central London.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.