Using the kids to reduce the tax bill
20/06/2008 send to a friend
If you thought your children were nothing but a big expense, think again. Did you know that paying your children to work in the business is a way to reduce tax? Alan Young explains, whilst daughter, Katie, makes him a cup of tea in duties declared as ‘company catering.’
Pocket money for them. Tax deductible for you.
Some 60% of UK businesses are family owned, and, in an earlier feature, we looked at the possibility of employing a spouse or partner in our home business, in order to reduce the year end tax bill with some extra wage costs.
That’s all very well, but what about the kids? Can we pay them a salary too? Everyone, including our children, has a tax / NI free personal allowance of around £5,500, so can we use this to our advantage?
The simple answer is; “Yes”, so here are a few of the basics:
The Children And Young Person’s Act states that no person under 13 years of age may be employed, other than in very specific areas, such as acting, modelling and sporting activities, so employing your 8 year old as head of marketing could just raise a few questions.
Under current legislation, the National Minimum Wage doesn’t need to be paid to workers in the family business, provided they are members of the employer’s family, and share the family home. That said, the more we can pay them (within reason), the greater the expense for tax purposes.
As with most things, common sense is the watch word here. We need to be able argue that our kids are performing tasks that are well within their capabilities. Many, these days, are highly computer literate, and may have done work for us on our web sites, spread sheets etc. Others may have helped us with despatching goods, filling mail shot envelopes etc.
So, as long as our kids are over 13, and they perform appropriate tasks, within our business, for a sensible salary, there is nothing to stop us paying them for work done, in order to reduce our business tax liability.
There is a wealth of legislation governing this, but, for most of us, it’s definitely worth some serious consideration.
- Alan Young, 1st Addition
- Business Link Page: Employing Family Members
- Insolvency Helpline: Employing Young People
Add a comment
* Denotes a mandatory fieldWhat's Related
- Limited Companies made easy
- Getting your invoices paid
- Spreading payments
- Next webchat announced: Wednesday 30th July
- Mortgage matters
- When should I register for VAT?
- Starting up as a limited company
- Is your garden office properly insured?
- It’s not yet midday but the questions are coming in fast...
Spare Room Start Up
Order our first book, Spare Room Start Up: How to start a business from home and save 35%! Join Emma on her book signing tour or find out what people are saying about the book.
Twitter updates
Map
Add your home business to the Enterprise Nation map
Here's how
Latest from the Forum
-
19/08/2008 by | Feedback please
-
19/08/2008 by | GOOD PRODUCTS FOR MEN AND WOMEN
-
19/08/2008 by | New Website Launched
Comments
Author: dee blick
Date: 20/06/2008
Comment: Wow, never thought of this and I have two teenagers on my hands until September. Getting them to load the dishwasher is in itself a challenge but I like the thought of paying them a trifling amount to do some admin for Mum.
My question is, does this work for limited companies are the rules the same for sole trader and Ltd/
Many thanks
Website:
Author: Alan Young
Date: 20/06/2008
Comment: Hi Dee.
Yes, this does work for limited companies.
It actually works for any type of business, but it will, in fact, be more appropriate, or at least more straightforward for limited companies.
The only reason I say that is, assuming you have received good advice from the start, you should be paying yourself a mixture of salary and dividends (a small salary to keep your NI contributions going for the year, plus a dividend to minimise the NI paid).
In this case, you will already have a PAYE scheme set up with HM Revenue & Customs anyway (whether you run it yourself, or your accountant, once a year). Adding the kids onto it is, therefore dead easy.
I know you are a limited company, but if, as before, you were a sole trader, then, unless you already employed staff, it is unlikely you would have a PAYE scheme in place (as you would be paying Class 2 / Class 4 NI). Therefore, you would need to set a scheme up in order to pay the kids.
I know what you're saying about teenagers, but all I would say on that front (and I never said this) is who can actually prove whether they have worked or not?
As long as you don't say they work for you 40 hours a week, when they're actually at a University 200 miles away, or on a year out in Thailand, no one is ever going to challenge it. (Hence my comment about common sense being the watch word.)
Website: www.1staddition.co.uk
Author: dee blick
Date: 20/06/2008
Comment: alan
you are so abundant in your good advice it is much appreciated. I so like it when people give advice with no motive other than to give. So with that bit of karmic stuff out of the way, great, I can suddenly see a role for the stroppy but talented 16 year old...
I do get salary (titchy one) and dividends, so
thank you
Website:
Author: Alan Young
Date: 21/06/2008
Comment: You're welcome Dee. You're not doing so bad yourself on that front.
Talking of which, good luck with the web chat. I shall be in Alcudia at the time but will try to catch it if I can.
I find that you really do get out what you put in, and I have not only picked up some new clients from it, but also some very useful business contacts as well, and, even though I've been advising on all aspects of small business startups for about 15 years, I still picked up some really useful stuff from Emma's book, which I'm now using on my web site, and in my business generally, so I'm really glad I got involved.
Just a quick note on the kids / dividends side. There is, in fact, no reason why you can't, if you wish, issue a few shares in the company, to the kids.
This has a double advantage; firstly, there is no NI on dividends, so there could be a saving there (though I appreciate this is unlikely yet, as they wont pay NI anyway until their earnings exceed about five and a half thousand) and, secondly, dividends are classed as investment income (hence no NI) so you don't have to prove it is 'earned' by the kids.
You mentioned that yours are on your hands until September. If they are off to University, for example, it may be tricky to prove they earn much of a salary working for yourself. If, on the other hand, they have a few shares, they are still fully entitled to a dividend, regardless of where they are, and what they are doing.
Doesn't suit everybody, but it is another option.
Website: www.1staddition.co.uk
Author: Claire Bennett
Date: 22/07/2008
Comment: This is really interesting advice Alan. I have twin girls aged 12 who do the odd bit of work for me (mainly computer based stuff and taking items to the post office). It is such a shame that I can't officially give them a salary. Is there any other way around it? (hopeful?)
Website: www.musicbugs.co.uk
Author: Alan Young
Date: 23/07/2008
Comment: Good question Claire.
There are a couple of possible options for you, but how appropriate these are to yourself will depend on how close your girls are to their 13th birthday.
If you don't mind, I'll pop you an answer together, then use it as one of the opening questions for the web chat next Wednesday.
To help me with a more appropriate answer for yourself, could you just drop me a comment back on here to let me know;
(a) when are the girls 13?
(b) are you running the business as a sole trader or limited company? and
(c) when is your accouns year end?
These will help me to evaluate the options, to see which one might suit you best.
Thanks,
Alan
Website: www.1staddition.co.uk