Employing Your Children - Our 3 Favourite Reasons For Doing It
Children are a joy! They are also a strain on your finances! Is there a way of employing your children within your business which allows you to pocket an overall tax saving and provide them with an income?
Let’s look at the options below and see if we can answer this all important question.
Employing Your Children - The Employment Rules!
Employing your children and paying them salaries is a good way to reduce your taxable profits but what are the rules.
With some limited exception, children under 13 cannot be employed. Children under the school leaving age may do light work which does not interfere with their education and is considered safe. The hours they can work vary whether this is term-time, weekends or school holidays. Above 16, they can work longer and in more varied environments with fewer restrictions.
As ever, get advice about the legalities, any necessary permits or possible assistance with employing young people through apprenticeships and similar schemes.
Employing Your Children - How Much To Pay?
The salary paid employing your children must be justified by the amount and level of work they do in your business.
If you employ your 15 year old son for an hour each night to do some some social media activity, a salary of £30,000 per annum would not be justifiable. However, a salary of say £3,000 should be OK.
The national minimum wage is a good yardstick to use when setting the salary level for younger children with no particular business skills. Exemptions do apply for relatives living in the employer’s household in terms of reducing the monies paid to them.
Whatever the situation, the yardstick for being reasonable is that you should pay no more than you would pay a non-family member with the same level of ability and experience.
If you we assume a rate of £5 per hour is justifiable, the range of salaries (that can be paid for the hours they can legally work) is from £3,780 for a 13 year old to £10,400 for a school leaver under the age of 18.
Employing Your Children - The Three Reasons?
So we know we can do it. The children are willing. We know how much to pay them. What the three reasons to employ your children?
1. The saving to you - Let's say you pay your two youngsters pocket money of £80 per month each (£1,920 a year). As a 40% taxpayer this takes £3,310 of your salary (£3,310 less tax at 40% of £1,324 and NI at 2% of £66). If, instead, your company pays them, the cost to you directly will be nil.
Plus, because their pay is tax deductible the cost to your company is just £1,536 if you are paying 20% corporation tax. That’s less than half the cost of pocket money! Further benefits might accrue if you are claiming tax credits.
2. The benefit to your company - If your business is growing, getting resource on board that can help you do the tasks at good rate is not something to be dismissed at all. You can’t dismiss your children but you avoid a lot of potential HR issues with a third party.
3. The benefit to your children - In the process your children have gained some valuable work experience they can put on their CV for you putting them to good use within your business.
Do note that there is the alternative strategy for older children of them setting up their own businesses, and acting say as your subcontractor. Your son might be gifted as a social media manager, and so you can give them the contract to manage your social media marketing at the same rate you pay a third-party supplier. Subject to clearing the tests relating to self-employed or employed status, then this might be a great way of employing your children for the reasons given above. Especially if you can save some extra national insurance in the process.
There are several great ways then of passing on your business income to your children directly that save you tax and help your business. However, this is the child’s income to keep. Any attempt to make the children pass this income back to you will make the planning ineffective, and the benefits lost!
Our Employing Your Children Call To Action
Employing your children that is what we call win, win, win.
Do remember to take advice regarding the legalities of employing your children so it falls within the employment and workplace rules.
Given the shifting nature of the tax system, do please ask your accountant to run through the numbers to make sure the maximum benefits do accrue to you at a price you can afford within your business and your household.
If you know of any other great reasons why employing your children can be good for your business or good news stories or tips for making this really work that can be shared with our readers then let us know via the comments or through LinkedIn.
Don’t be shy about employing your children in the business. It is good for you, your bottom line. your business and for them!
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