Date posted: 3rd Sep 2025
Many business owners consider employing a spouse, family member or child in the business.
While this can be tax-efficient, there are rules you must follow to stay compliant with HMRC and avoid potential pitfalls.
Why Pay a Family Member?
Paying a salary to a family member can help reduce your business’s tax liability. For example:
- The salary may be a deductible business expense (although see below).
- If the family member has little or no other income, their personal allowance can be used, reducing overall tax exposure.
Key Rules to Follow
Genuine Employment
The role must be real. HMRC expects the family member to:
- Actually work for the business.
- Be paid a reasonable market rate for the tasks they perform.
- Have duties and responsibilities.
Commercial Pay
You must pay a salary that reflects what a third party employee would be paid for the same work.
Excessive pay for minimal work may be disallowed as a tax deduction but still taxable on the family member, potentially leading to an element of double taxation as there would be no relief in the business but the family member may have suffered tax.
Proper Payroll Records
Even if it’s a family member, you must:
- Register them as an employee with HMRC.
- Run payroll and issue payslips.
- Make deductions for income tax and National Insurance where necessary.
Minimum Wage
Standard minimum wage rules apply unless the business can be argued to be a family business and the family all live in the same home. This would not apply for a limited company.
For more information on this see https://www.gov.uk/hmrc-internal-manuals/national-minimum-wage-manual/nmwm05160
Child Employment Laws
There are minimum ages when children can work – for more information see https://www.gov.uk/child-employment
Avoiding HMRC Challenges
If HMRC deems the employment artificial or the pay excessive, they may:
- Disallow the salary as a deductible expense.
- Reclassify payments as distributions (in the case of company owners).
- Impose penalties.
To protect your position:
- Keep clear records of work done and evidence a market rate salary.
- Maintain contracts or written terms.
- Make payments through the payroll like any other employee.
Conclusion
Paying a salary to a spouse, family member or child can be tax-efficient if done properly. However, it’s essential to meet the commercial and legal requirements.
As ever, we are here to help.
