Tax Efficient – Family Members

Family members, particularly your spouse or children, can provide tax advantages if done correctly.

However, it is essential to understand and comply with HMRC guidelines to avoid any potential challenges.

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Topics Discussed:

• Understanding tax implications and compliance when employing family members.
• Strategies for wage levels and tax planning and ensuring reasonable and justifiable remuneration.

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Guidelines and Compliance for Employing Family Members

You can employ your spouse, civil partner, or other family members whether you operate as a sole trader, partnership business, or through your company.

However, wages must meet or exceed the National Minimum Wage (NMW) or National Living Wage (NLW).

HMRC will challenge remuneration rates if they believe the expense is not 'wholly and exclusively incurred' for the business. Therefore, it is crucial to ensure that remuneration is reasonable and aligns with the 'arm's length principle.'

We will take a look at some of the potential Tax liabilities, and what can be done to minimise them.

National Insurance Contributions (NICs)

NICs for Employees

Employers’ NICs stand at 13.8% on earnings above ￡9,100 per annum for the tax year 2023-24.

Employees are subject to Class 1 NIC contributions. For 2023–24, the rate is 12% on earnings between ￡12,570 and ￡50,270, and 2% on earnings above ￡50,270.?

These contributions are deducted from wages by the employer.

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NICs for Self Employed

The self-employed are subject to Class 2 and Class 4 NIC. The rate for Class 2 NIC is a flat ￡3.45 per week.

Class 4 NIC is paid as a percentage of annual taxable profits: 9% on profits between ￡12,570 and ￡50,270, and 2% on profits over ￡50,270.

These contributions are paid on the self-assessment schedule in January and July.

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Tax Planning Strategies

When planning wages, consider whether your spouse should be an employee or whether the business should become a partnership with the spouse as a partner.

This can save on Employers National Insurance and may remove any taxable employee benefit charges on cars.

Evaluate the tax cost of proposed wages, especially when salaries exceed the personal allowance, as additional tax and NICs can diminish savings.

Ensure that wages are 'wholly and exclusively' for business purposes by defining job roles clearly and maintaining employment contracts.

Compare the wages paid to family members with those paid to third-party employees doing similar jobs.

Weigh up any additional flexibility or responsibilities that family members may bring to the role.

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Employing Children: Guidelines and Considerations

There are many restrictions when employing children, but there are still methods to ensure their employment remains tax-efficient and compliant with the law.

Ensure PAYE and NICs are applied under a contract of employment and adhere to restrictions on the type of work children can perform based on age.

Wages paid to minor children must reflect actual work performed to avoid the settlements legislation, which taxes income over ￡100 as the parent's income.

HMRC tends not to challenge wages if PAYE and NICs are applied fully under a contract of employment.

However, remember that children are restricted in the type of work they can do while at school age.

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Additional Benefits for Couples with Children

Aside from pensions and basic benefits in kind, there are additional tax breaks worth considering for unincorporated businesses:

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• Child tax credits are improved if both parents work longer hours. Structuring employment to pay a spouse less for longer hours can maximise a tax credits claim.
• Ensure compliance with National Living Wage requirements, and remember that under the tax credits regime, 'notional income' can increase earnings to a market rate if someone is underpaid for a job.
• Planning with child tax credits and working tax credits requires careful thought, especially regarding pension contributions and childcare vouchers.

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Wages Compliance and Payroll

Ensure all Real-Time Information (RTI) filing obligations for PAYE are met.

Confirm that all employees are paid at least the National Minimum Wage or National Living Wage and claim the Employers’ NIC allowance if available.

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Employment Contracts and Regular Reviews

A written contract of employment is vital for all employees, including family members.

It provides useful evidence in case of disputes and ensures that HMRC cannot challenge the agreed terms.

Review all arrangements annually to ensure they remain compliant with current laws.

Wage Levels: Justifying Higher Wages for Family Members

Justifying higher-than-average wages for family members can be supported by several factors:

• They might work longer (unpaid) hours.
• You place more trust and reliance on them to work diligently.
• They safeguard your assets and maintain customer relations.
• You can discuss business matters out of hours.
• They offer greater flexibility as workers.

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Employee Benefits for Family Members

Employee family members can receive remuneration through various methods to help extract profits.

These include:

• Employer pension contributions.
• Benefits in kind such as mobile phones, car parking, bicycles, healthcare discounts, and life cover.
• Employer reimbursed expenses, like working from home allowances (￡6 per week, ￡4 per week prior to 6 April 2020), and lunch provisions.

Summary

Employing family members can be a strategic move to optimise tax efficiency within a business.?

However, compliance with HMRC guidelines is paramount to avoid challenges and penalties.

Proper planning and documentation, along with understanding the full scope of tax implications, can help in making informed decisions.

For expert advice and tailored tax planning strategies, contact Tax Expert today. We’re ready to assist you in addressing these complexities and ensuring compliance with HMRC regulations.

Our extensive experience with HMRC means we’re well suited to deal with their regulations.

Give us a call today at 01772 788200, or on our 24/7 WhatsApp at 07787 010190.