Posted: 22nd July 2015
Guest post by Natalie Butlin for Accounts and Legal – helping small businesses benchmark their performance
A family business is a lot of work. Sometimes it can seem your whole life is consumed by it. Your partner grits their teeth as you question their expenses, and your children become monosyllabic as they knead dough or help with the lambing before school. But if you make their involvement official, there could be big benefits. How can you use your family to minimise your tax bill?
Embrace child labour
13-16 year-olds (before the school-leaving date) can be employed for ‘light work’ and aren’t eligible for minimum wage. Depending on your location, there are restrictions on the hours they can work. They have the same tax free allowance as you, £10,600 in 15/16. Teach them the importance of hard work, the value of money, boost their CV, keep labour costs low and save tax.
Wanted: Part-Time Tea Assistant, £75,000 p/a
Adding family members to the payroll is an old trick to minimise taxable profits, but now your family employees must justify their income in terms of the work they put into your business and their rate of pay. That being said, don’t undervalue them. If your spouse is a lawyer, and provides regular consultation, you can pay them their full fee; if they’ve been doing your bookkeeping for years, it’s likely they’re due a pay rise to reflect their expertise.
And did you know that employees who are considered household members do not have to be paid national minimum wage either? There is also no National Insurance to be paid for employees under 21, or for the first ten employees of your small business.
Macbook Pros all round!
If you buy your employees tax-deductible equipment like office laptops and company cars, HMRC doesn’t mind how much you spend on these. You can offer a range of benefits tax-free like annual healthcare check-ups, mobile phones, parking and meals in a staff canteen. While generally you want to minimise costs, these things improve morale and productivity. If your employees are family members you may consider supplying your “employees” their equipment at Christmas.
If your family members are entrepreneurs, your company could invest in their business, or, if their business is relevant to yours in any way, you could finance it as a side-arm of your company.
If they work only for you, make sure you divide their pay between salary and dividends, as this will be more tax-efficient. Family members don’t have to be directors to be paid dividends; you can gift them shares. Remember even a newborn babe can be a shareholder, so while they can’t work for you yet, they can still help you extract money from your company in a tax-efficient way. This is also prudent as part of your longer-term inheritance and capital gains tax planning.
Pushing up the daisies tax-efficiently
If you want to you may gift anyone personal assets and money, but you will already have paid corporation tax and income tax on money taken out of your company, and things can get very complicated with capital gains tax on large gifts and property. There are also different tax rules for spouses and children if you keel over under seven years after presenting a gift.
If your children want to run your company after you’re gone, you should read up on business property relief. Many businesses qualify for 50% or 100% relief from inheritance tax, so if your daughter is going to be CEO one day, perhaps she’d prefer a healthier, happier company (and a lavish office) with funds in reserve, than a gift post-tax.
If you want advice on how to minimise tax to benefit your family, give us a call today. We are London accountants offering a full range of tax and accountancy services, from VAT returns to financial planning, and payroll to tax-efficient investment advice.