Tax rules when employing family members

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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 if you are to avoid 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. It should be noted that family members who live in the family home and who work in the business are outside the scope of the national minimum wage. Where family members work for the family business but do not live in the family home (for example, grown-up children), you must pay at least the national minimum wage.

Where the amount earned exceeds the “lower earning limit” (currently £118 a week, £512 a month or £6,136 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.

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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.

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

Company directors who are also 'workers' must be paid at least the NMW.

Can I employ 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 unless they also live in the family home.

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

What are the rules if I employ my children, but they are still 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 advice on employing family members?

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.

Written by Elaine Clark, founder and managing director of Cheap Accounting.

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