Tax rules about employing family members

By: Elaine Clark

Date: 28 November 2011

Paper family{{}}On the face of it, employing family members can be a good idea. You know them well, so all of the issues of trust and reliance on a stranger should be eliminated.

However, the existence of the family relationship does not bypass any employment laws or any issues relating to tax. Knowing your duties in this area is essential to not falling foul of the law and incurring fines or penalties.

Can I employ my partner or spouse in my business?

Regardless of your business structure (sole trader or limited company) you can employ your partner or spouse in your business.

The general rule is that your partner or spouse should be paid for the effort and hours worked in your business. You must pay your partner or spouse at least the national minimum wage (you can’t get away with paying less).

Where the amount earned exceeds the “lower earning limit” (currently £102 a week, £442 a month or £5,304 a year) you must register as an employer with HM Revenue Customs (HMRC), complete the required PAYE records and file annual returns.

So, just like employing anyone else, you must comply with the tax laws.

What about company directors?

Directors of limited companies who hold office and do not have a contract of employment are outside of the scope of the national minimum wage (see the Directgov website for further information)

This means that a director can be paid an amount that does not incur tax or national insurance.

What about employing my children?

Subject to employment laws, you can employ your children in the business. Again you must pay them the relevant national minimum wage for the hours they work.

It may also mean that because of the payments made to your children you must register with HMRC as an employer. Be sure to check or else you could incur fines and penalties.

What if my offspring are students?

If you employ a student at any time other than their normal holidays, you operate PAYE as normal. However, if you have children at college or university and you employ them solely during the summer, winter or Easter holidays, you may be able to apply special rules to their pay which can make the administration simpler and negate the need for you to register as an employer with HMRC.

If you meet this criteria, you may be able to pay the student without deducting tax, although in most cases you will still have to deduct and account for national insurance. Full details can be found on the HMRC website.

Where can I go for more advice?

Employing anyone is complicated and a minefield of rules and regulation. To ensure that you do follow the rules on this it is always best to seek specific advice from your accountant who will know and understand your circumstances and can make sure that you adhere to the tax laws and your solicitor for employment law issues.

Using 20 years’ experience spent working at some of the UK’s leading businesses, award-winning chartered accountant Elaine Clark is the founder and managing director of www.cheapaccounting.co.uk, an online accounting service aimed at small businesses with big ambitions.

See our Tax Donut for more detailed information on UK tax