Can You Save Tax by Employing Family Members?

Family Members as Employees: How to Save Tax

There are many advantages to employing family members in your business. Not only you can trust them implicitly, but you can also help develop their skills and add to their resumes. Additionally, paying your family members through your limited company can help reduce the overall tax burden on your family. This arrangement can turn your company into a true family business, with all the following advantages.

Tax benefits of paying a salary to family members

The tax advantages of employing family members in a firm may be significant. Your spouse, civil partner, or children might be eligible for lower tax rates and personal allowances. This can help you save money on your taxes as a whole. If you are considering starting a business or are already running one, it is worth exploring the potential tax advantages of employing your family members.

Salaries are a company’s primary expense, and they have the benefit of lowering the overall tax bill. The spouse and children will be taxed on their salary, but depending on their other earnings and allowances, this may still reduce your overall tax bill. Considering paying your family members a salary for their work, keep in mind that no taxes or national insurance contributions are required to pay if the salary is less than £9,880From 6th July 2022, the threshold will be increased to £12,570, and no tax is needed to pay if the salary is less than £12,570. However, your company can save 19% of the amount paid in corporate tax.

Things to Consider Before Paying Your Spouse a Salary

There is no tax advantage in paying your spouse a salary if he/she already earn above the higher rates tax threshold of £50,270. If your company did this, it would only save corporation tax at 19%. But your spouse, on the other hand, would have to pay tax at a rate of 40% on their income.

Tax benefits of spouse being shareholder of the company

Alternatively, the spouse can take dividends instead of a salary by transferring shares. It might be an excellent method to decrease your family’s overall tax burden. But salary aids in reducing business tax, but the dividend is paid out of profit following tax.

However, it’s critical to ensure that the shares you transfer should represent your spouse’s contribution to the company’s activities.

 

Employment laws to consider when employing family members.

 

There are a couple of things to think about when having family members work for you. The primary guideline is that they should be compensated for their efforts according to the hours worked, which aligns with the national minimum wage. If the family member lives in the family home and works for you, they may be exempt from the national minimum wage.

However, if your children work for your company but do not live in the family home, you must pay them at least the national minimum wage. Children may begin working part-time from the age of 13 and full-time from 16. However, they must continue to attend school or training until they are 18 years old.

 

Justifying a salary

Suppose you choose to do so. There are a few things to keep in mind. You need to be able to justify a salary for your spouse/partner or children. You will also have to think about the value of their work and what you would pay someone else in that position doing similar tasks- this should come out at a commercial rate.

It will be tough to justify paying your spouse £80 an hour for the company data entry clerk position. Think about what you would pay someone who wasn’t related to you, which should keep you in the right area. Make a record of how many hours an employee has worked and what they have accomplished, just as you would for non-related employees. This will help ensure that you pay your spouse a fair wage for their work.

 

In short, if you are looking for ways to reduce your tax bill, employing family members may be a good option. Before doing so, there are a few things to consider, such as what tasks they will be performing and making sure they are paid fairly for their work. Our team of experts can help you through the process of hiring family members and making a tax plan.

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