Employing Family Members in your business
Employing a family member in your company in the UK can have several benefits, both for the business and the family member.
As a business owner it is crucial you manage your time wisely and if possible, delegate the tasks that generate no revenue to someone else. Those tasks include managing day to day admin, client communication or social media and website management.
Family members tend to have strong bonds, which can result in a high degree of trust and loyalty. This can be beneficial for the business as it reduces the chances of dishonesty or internal conflict.
You will share similar values, goals and vision for the business, leading to more cohesive work environment and smoother decision-making processes.
Lower recruitment cost and flexibility
Hiring a family member can help you save on recruitment and training expenses, as there may be less need for an extensive hiring process and formal training. Furthermore, your child or a spouse may be more willing to take on different roles and responsibilities within the company, providing the business with increased flexibility in terms of job allocation and resource management.
Salaries paid to employees, including family members, as a business expense, can be deducted from a company’s taxable income, which reduces the amount of corporation tax that the company needs to pay.
If you consider paying your child or spouse for administrative assistance with the business. If you set the salary at £12,570 per year and they have no other income, the liabilities and saving would be as follows.
|EE NI due
|ER NI due
|£12,570 per year
|13.8% on £9,100
|nil if the employee is under 21 years old
The main corporation tax rate in the UK is currently 25%, although many small companies will not pay the full rate. For the purposes of the illustration, we assumed our company’s annual profits are £50,000 or less so the CT tax is 19%:
Employer NIC due on the salary of £12,570 = £478.86.
Corporation tax saving = £2,388.30 plus 19% of the Employer NIC £90.98.
As a single director enterprise, you would not be eligible for the Employment Allowance business relief of £5,000 reduction on the company’s employer NIC bill. As you now have 2 or more employees you may be eligible for the Employment Allowance, reducing your employer NIC significantly or altogether.
What are the drawbacks?
Whether your employees are your family members or friends, employing them means complying with the law and there are certain things you will have to consider.
Automatic enrolment pension
As a single director you would normally be exempt from the automatic enrolment duties. However, when you employ someone else, you will have automatic enrolment duties and they begin on the day your first member if staff starts work.
There are few pension providers that work with small and new employers and there is a lot of information on the pension regulator’s website.
National Minimum Wage
All workers in the UK that are at least school living age, are entitled to the National Minimum Wage for their job.
The rates are revised every April and the current rates are noted below.
National Minimum Wage (NMW) and National Living Wage (NLW) Pay periods from 01/04/2022 Pay periods from 01/04/2023 National Living Wage
(ages 23 and over)
£9.50 £10.42 21-22 year old rate £9.18 £10.18 18-20 year old rate £6.83 £7.49 16-17 year old rate £4.81 £5.28 Apprentice rate (First year only) £4.81 £5.28 Accommodation Offset £8.70 £9.10
When you employ children that are younger than 16, they can only work part-time and can carry out only ‘light-work’. There are several restrictions on when and where children are allowed to work and special rules apply during term times and school holiday times.
You must consult your local council for more information.
Without real commercial justification you must not charge wages to the business. You must be clear about the number of hours a family member will work the rate of pay per hour and the duties they will be performing. Their salary must be reasonable for the work they do. The best thing is to consider what you would pay someone who isn’t related to you and set the salary at that level.
It is not enough to make an entry in your account for the child or spouse salary – you must actually make a payment to them and be able to prove to a tax inspector the payments were made. Paying them by a bank transfer offers the best audit trail.
Salary or Dividends
As an alternative to paying a salary you could grant your family members shares but this is beyond the scope of this article. Speak to your accountant about available options.
In conclusion, engaging family members in your limited company can provide a range of benefits, such as improved productivity, tax advantages, and potential savings on recruitment and hiring costs. However, it’s important to consider the potential challenges, legal obligations, and compliance requirements when employing family members.
Here are some key takeaways to consider:
- Ensure that there is a genuine business reason for hiring a family member and that the compensation is fair and reasonable for the work performed.
- Stay compliant with the National Minimum Wage (NMW) requirements and other legal rights of employees.
- Maintain clear records of hours worked, tasks completed, and payments made to family members to provide evidence if required.
- Be aware of the specific rules and regulations surrounding employing minors and ensure their work does not interfere with their education.
- Consider the pros and cons of making a spouse a shareholder in your company and consult an accountant to discuss your specific situation.