Related Links

Tax news

Keeping it in the family

Your spouse has been made redundant. Can you reduce your tax bill by taking him or her onto the books of your business? After all, it’s reported that nearly 30 members of the Government including four Cabinet ministers employ members of their family (at our expense). So is sauce for the goose also sauce for the gander: what are the rules on employing family members in the business?

The basic rule is that the costs of employing a family member will have to pass the same test as every other cost, and be incurred “wholly and exclusively” for business purposes. Note that there is no “necessary” test: the question is not whether you could get by without employing your spouse but whether he is she is being paid nor more than the going rate to do a genuine business task which is actually being carried out. Thus if your business involves your being out and about a lot it is perfectly possible that you might want your spouse to takes calls and messages in your absence. Or after a heavy day’s work you may need some help in writing up the books. Or it may be that your spouse has some special skills that the business can use: IT or design skills for example. If you work from home to any extent someone has to clean and maintain the office and make the tea. The application of a little imagination will usually come up with a surprisingly large amount of support work that can be undertaken for any business.

Don’t forget that the normal PAYE procedures will apply to employment of family members including the need for the employee to provide a P45 or to sign a P46 (or P38(S) for a student doing vacation work). How much can you pay? Well, as a starting point remember that the National Minimum wage is now £5.73 per hour (a bit less for under-22s): but bearing in mind that the work may be intermittent and undertaken at unsocial hours a premium will usually be in order. As to the total that is tax-efficient – bear in mind that if pay is high enough there will be PAYE tax and the dreaded National Insurance (or as some of us prefer to think of it – Employment Disincentive Tax). But we speculate that most businesses will be able to justify a modest couple of hours a day or so which (assuming that the spouse has no other income and the business owner is taxable at 40%) can easily cut the family tax bill by a something like a couple of thousand pounds a year. Add in something for any useful work that other family members may be able to do (perhaps students helping out in vacations) and the savings can be well worth having without needing to risk confrontation with HMRC by overegging the pudding.

For advice on your particular circumstances talk as always to your usual contact partner.