Employees must be paid at least the National Minimum Wage (NMW). From 1 October 2013 this is set at £6.31 an hour for workers aged 21 and over (rising to £6.50 per hour from 1 October 2014).
Dividends do not count towards the NMW. This could potentially be a problem if a shareholder/employee is paid a small salary and a dividend.
However, the NMW does not apply to directors who do not have a contract of employment with the company, so appointing family members over the age of 16 as directors will overcome any NMW issues.
However, if family members are employed by the company and are not directors, the need to pay at least the NMW will impact on the profit extraction policy.
Example:
Lucy is a shareholder and works for the family company. She is not a director. She works 15 hours a week. She must be paid at least £94.65 per week (rate from 1 October 2013) to comply with NMW legislation.
Her brother Brad also works 15 hours per week. However, he is a director without a contract of employment so the NMW legislation does not apply.
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