Q&A: Should I employ a family member?

Employing a relative to work for your business is quite different from recruiting someone else. What additional considerations are necessary before hiring your kith and kin and is it a wise idea?

What are the pros and cons of employing family members?

Theoretically, you'll get extra commitment because it's a family concern. Family members are often more committed because they see longer-term rewards. On the flipside, a relative who doesn't want to be involved may resent their position or might simply not be cut out for the role. Non-family employees could question why a relative is given a more senior role when other candidates are better qualified. Such appointments need to be handled sensitively, as they can harm morale.

What are my criteria for employing relatives?

Ask them if they really want to work for the business. Do they have the necessary skills? What qualities will they bring? It must be a business decision and not one based on sentiment.

Ask yourself if you can afford to take them on. It may be cheaper in one respect, because if they live at home (ie in the same house as you) and help run the business, the National Minimum Wage won't apply.

Also ask yourself if you're prepared to treat them impartially and involve them in decisions as you might any other employee. A family member shouldn't be treated as a 'skivvy'.

Are there different tax arrangements when employing family members?

Family employees are taxed in just the same way as regular staff - through PAYE. HMRC would come down very hard on any attempted tax evasion, such as the use of cash payments.

Issues can arise where dividends are paid to family members owning shares. These payments must be distinguished from salaried pay because they won't attract National Insurance contributions or tax on dividends up to the dividend allowance of £2,000. Dividends over the allowance are subject to tax at 7.5% for basic rate tax payers, 32.5% higher rate tax payers or 38.1% for additional rate tax payers.

HMRC will also scrutinise income shifting between family members. They'll want to make sure that if a spouse or child is being paid by the business, they're actually doing the work to justify that salary. This is to deter higher-rate tax-payers shifting income onto lower-paid family members to avoid paying tax.

Should I consider a straightforward employment contract or a partnership?

It's a difficult decision that requires careful consideration. Partnerships are easy to get into but difficult to dissolve unless a properly drafted partnership agreement exists. Generally speaking, it's easier for employer and employee to join and part company using a regular employment contract.

What are the legal implications if there are problems at work?

Relatives have the same legal rights as the rest of your workforce and can just as easily bring claims for discrimination or unfair dismissal. If disputes arise, they can often become bitter and unpleasant, spreading beyond initial disagreements to affect the whole family.

What does the * mean?

If a link has a * this means it is an affiliate link. To find out more, see our FAQs.