Tax Saving Tips – Employing Your Family

Tax Saving Tips – Employing your family

Tax saving tips are aimed to help even small businesses save money.

As with most Tax Saving Tips this one is easy to put into practice for many businesses and can have a real impact on the quality of life for the owners of businesses. Starting to employ a member of your family is a great Tax Saving Tip. It may already be happening for free and you are missing out on a possible tax deduction expense. To get a allowance against your profits, your employee carry out some duties for the business.

Tax saving tip works because every individual in the UK has an amount Annual Personal Income Tax Allowance that they can earn without paying tax. In the tax year to 5 April 2015 this is £10,000. Earnings at this rate need to be included in your normal payroll and will be subject to some National Insurance, which will accrue an additional benefit that their earnings will be credited to their state pension fund.

Using up someone’s tax free personal allowance is important, but this tax saving tip can also work where the business owner is a higher rate tax payer and could employ a member of their family who is paying tax at a lower rate. If you are paying tax at 40%, 45% or even 62.5%, if your partner is paying tax at 20% then significant savings can be made.

Who can you employ?

You can employ any family member, but to comply with legislation every employee should be over 13.

How much should you pay them?

As with all employees the rate of pay will vary with the tasks that they are carrying out. You should look to pay close to the market rate for the role, but if someone in your family acts as your non executive director and sounding board, then that role should not be underestimated (Tax Saving Tip: An independant Non-Exec could cost  over £200 per hour).

With children, it will be extremely difficult to justify to HMRC why your 13 year old was paid £100 per hour as a filing clerk, but if they have developed your award winning website the story will be different. So long as the rate is in line with what you would normally have to pay there should be no problem. You should also bear in mind that children, who are in full time education have a limited number of hours they can work, but if they do a few hours filing, cleaning or other helping out, then their pocket money can become a tax allowable deduction.

Actions
  • Make sure that the family member does not have other taxable income and how any extra income will not affect benefits
  • Gather all the necessary data together (ie Full Name, NI number, etc)
  • If the payments are over the lower earning threshhold for NI enter the new employee on the payroll
  • Pay you family
  • Reduce the tax payments on your profits
Links

Payroll services from Russell & Co

 

To discuss the above with Brian Russell either call him on 01661 872004 or email: brian.russell@profitabilitygroup.co uk

About the Author

Brian RussellBrian Russell FCA is a Chartered Accountant with over 35 years of experience working with owner managed businesses in North East England. He formed Russell & Co in 2000 to build upon his experience to provide high quality part time financial directorships for smaller companies particularly in Newcastle upon Tyne and Northumberland. Russell & Co is based in Ponteland.View all posts by Brian Russell →