Is employing family tax efficient?

Putting family on your payroll can be tax efficient if HMRC allow it, but what happens if they challenge it?

For an expense to be tax deductible it has to be incurred wholly and exclusively for business purposes.

If you employ your family members, this may gain HMRC’s interest.

HMRC will want to establish that the family member actually works for the business and isn’t being paid just to get money out of the business.

They will also want to check that the work they do justifies the salary you are paying.

HMRC says if there if equal pay for equal value the amount paid is fully allowable.

Keeping proper records will help a lot in terms of persuading HMRC that the wage is correct.

You should keep the same records as any other member of staff;

  • Personnel records, including their contract
  • Including them on Payroll
  • Following the pension auto-enrollment procedure, etc.

If you are employing a family member they should be paid at the market rate and no more.

If they are the only employee, or have a unique role in the business, determining the rate of pay can be difficult.

If in doubt you could speak to an accountant, as they will probably have experience of similar situations and might be able to help you.

If you do have to concede to a reduction in the amount paid, the PAYE and NI on the extra amount will not be refundable to you.

HMRC can’t disallow a wage because they think the job is not necessary to the running of the business.

So, as long as you pay the going rate for the job, you could employ your family to clean the cupboards.