Tax Insider Tip: Employing Family Members

In a family company situation it may be beneficial to employ family members, such as children or spouses, in order to extract profits from the company and to utilise unused personal allowances.

Care should be taken to ensure that the family member does some work in return for the income to avoid challenge from HMRC.

The same principle can be extended to utilise basic and higher rate bands to reduce the overall family tax bill.

Example:
Brown Ltd is a family company of which Ed Brown is the sole director and shareholder. He employs his wife Joanna and his three adult children Max, Zach and Emily, paying them each £10,000 to utilise their personal allowance for 2014/15. No tax is due and but a small amount of NIC will be due. Ed is a higher rate taxpayer.

By paying his wife and children £10,000 each, which is received tax-free, rather than making an additional payment of £40,000 to himself, the family is able to save tax of £16,000 (£40,000 @ 40%) assuming that had the payments been made to Ed Brown, he would have paid tax on them at the higher rate.