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Does HMRC object to putting family members on the payroll?

It’s said that more than half of small businesses in the UK are family-owned, mainly in the wholesale, real estate, construction and transport sectors

They employ more than 12 million people and generate more than a quarter of UK GDP. In London, it is estimated that there are more than 800,000 family businesses.

Even if you are the single owner of your limited company or a sole proprietor, there may be situations where you need an extra pair of hands helping you with the running of your business. In most instances, you turn to your spouse or family members as you know you can trust them to help you out on short notice. As such, questions relating to ‘can you put family members on the payroll’ abound, which is why our payroll specialists at Tax Agility aim to explain the ins and outs of hiring family members.

Family ties are irrelevant

First of all, it must be explained that HMRC deems your family ties to be entirely irrelevant when it comes to who is placed on your payroll. You can definitely employ your spouse or any family members and put them on your payroll.

What HMRC is very much interested in is what your company gets out of the arrangement. In other words, the person who is being paid a wage appropriate to the job should actually be doing the job. There must be no special treatment paid to the family member through an inflated salary, reduced working hours, or anything that falls outside the ‘equal pay for equal value’ idea.

Creating work for a family member

Many business owners incorrectly assume that 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 provided 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.

In general, the rules you must follow include:

  • The work must be real and your family members must be paid commercially viable wages. You can’t get away by paying them £2 an hour to do bookkeeping nor £100 an hour to answer telephone calls.
  • Payments must be made and records are kept.
  • You (the employer) and them (the employees) must pay National Insurance contributions if they earn more than £166 a week.
  • Obey child employment regulations if the family members involved are between 13-16-year-olds.

Should you make your family members shareholders?

As tax on dividends is lower than on salary, you may consider making your spouse a shareholder and allowing them to receive dividend payments instead of salary.

Here’s an example, assuming your spouse receives £35,000 in dividend payments in tax year 2019/20:

  • The first £12,500 is tax-free (personal allowance)
  • The first £2,000 of dividend is tax-free (director allowance)
  • Dividends up to £37,500 are taxed at 7.5%
  • This means the tax bill they are liable for is only £1,537.50

In comparison, if they receive £35,000 in salary in tax year 2019/20, then they are liable for £4,498 income tax.

Tax advantages

The salaries, commissions and bonuses you pay to your employees are tax-deductible expenses because they incur wholly and exclusively for the purposes of the business.

Here’s an example, assuming you hire your sister to do filing for £50 a week (£2,500 a year), you can offset this amount against your profit for income tax purposes. If you’ve done the work yourself, then you would be spending more time in the office while not enjoying the tax benefits.

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.

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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

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