Running a business in the United Kingdom often involves navigating a complex web of taxes and regulations. However, there are strategies that savvy business owners can employ to legally minimize their tax liability. One such strategy, which is sometimes overlooked, is employing your children. By law, it is possible to employ your child(ren) from the age of 13 on a part time basis. Once they reach the minimum school leaving age, they can work full time in the business (maximum 40 hours per week). It is important that what you pay them can be justified in terms of actual activities on behalf the company. In this blog, we will delve into the tax benefits of hiring your own children in the UK.
1. Tax Deductions
One of the primary tax benefits of employing your children is that you can deduct their wages as a legitimate business expense. This means that the money you pay your children for their work can be deducted from your business's taxable income, reducing the overall tax burden. You do not need to pay your child(ren) via PAYE unless their income exceeds the personal allowance before the age of 16.
2. Utilizing Your Child's Personal Allowance
In the UK, every individual is entitled to a personal allowance—a certain amount of income they can earn each year before they must pay income tax. For the 2023/24 tax year, the personal allowance is set at £12,570. By employing your child and paying them a salary, you can utilize their personal allowance effectively. This means they can earn up to the personal allowance amount tax-free, which can significantly reduce your family's overall tax liability.
3. Pension Contributions
If you employ your children, you can also consider setting up a pension scheme for them. Contributions made to a pension scheme for your child are tax-deductible as a business expense. This not only helps secure their financial future but also provides additional tax benefits for your business.
4. Teaching Financial Responsibility
Hiring your children can also be an excellent way to teach them financial responsibility and work ethics from a young age. It offers them the opportunity to gain experience about taxes, budgeting, and saving, which can be valuable life skills.
5. Family Business Inheritance Planning
If you have a family business and plan to pass it on to your children eventually, employing them early on can be part of a long-term succession plan. By getting involved in the business early, your children can gain valuable experience and understanding of how the business operates.
Important Considerations
While employing your children can offer numerous tax benefits, it's essential to ensure that the arrangement is legitimate and complies with UK tax laws:
- Fair Compensation: Pay your children a fair market wage for the work they perform. The payment should be commensurate with the tasks and responsibilities they undertake.
- Keep Records: Maintain accurate records of their working hours and duties performed. This documentation will be essential for demonstrating the legitimacy of their employment to tax authorities. It is important that their pay can be justified in terms of actual activities on behalf of the company.
- Comply with Employment Laws: Ensure that your child's employment complies with UK employment laws, including health and safety regulations, working hours for minors, and employment contracts.
- Seek Professional Advice: Before implementing any tax-saving strategies, it's advisable to consult with a tax advisor or accountant who is well-versed in UK tax laws. They can provide guidance tailored to your specific situation.
Conclusion
Employing your children in your UK-based business can be a win-win situation. You can benefit from valuable tax deductions while providing your children with a valuable learning experience. However, it is crucial to ensure that the arrangement is carried out within the bounds of the law and is a legitimate business practice. Always seek professional advice to maximize the tax benefits and ensure compliance with all relevant regulations.