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  • Stephen Kelly

CAN MY COMPANY PAY A MEMBER OF MY FAMILY?

One of the most common questions put to accountants and tax advisors (and of course what should be by accountants to their clients in reverse) is whether or not you can / should employ a family member within your company. This is from a pure taxation perspective of course, as I’m not equipped, trained or indeed willing to deal with tricky internal family politics!


Paying a salary to a family member can be one of the most efficient solutions in mitigating a company’s tax bill and increasing the amount of net cash drawn by a company director(s). The family member is often the spouse or civil partner, but it can also be to children of working age.


As well as a general income tax saving there is also the benefit of the non income earning spouse being given a National Insurance contribution credit towards their state pension entitlement and a salary can help fund pension contributions as well.


Sounds good - what's the catch?


Like the other of the more obvious tax planning opportunities, overly excessive exploitation of the rules has led to various challenges by HMRC resulting in specific “settlements legislation” being drawn up by HMRC, to directly counteract any overzealous income splitting tax planning.


The “settlements legislation” for company directors is unsurprisingly complex, but in short it is designed to counteract any planning that diverts any from one director to a family member who would pay income tax at a lower rate than if all the income is assessed on the director of the business.


Various cases have found their way to the Court when the taxpayer has disputed HMRC's argument that a settlement agreement has been in place. HMRC have won most of these cases, but the had been one landmark president awarded in the taxpayers favour which was the Arctic Systems’ case (Jones v Garnett 2007 UKHL 35) meaning a gift of shares to a spouse that carried a right to a dividends is a gift and not a settlement, so it was not caught by the settlement legislation and is therefore a fairly robust great tax planning solution.


What level of salary can I pay my spouse


If we are looking at paying a salary as opposed to changing the ownership of a company to utilise dividend planning (both options can be used simultaneously of course) then the family member does need to be commercially earning the amount that is paid over to them in return for work they have completed. If the amount of salary paid is disproportionate to the amount of work undertaken by the family member, HMRC could argue that that the arrangement is not a bona fide commercial salary and look to reassess the income back on the company director. To backup HMRC’s challenge they would look to challenge any non commercial salary in the view that this was not paid “wholly and exclusively” on behalf of the business and look disallow any such uncommercial salary any deny any tax relief deductibility for Corporation tax purposes


Don’t forget National Insurance Contributions (NIC)


When looking at the corporation tax and income tax savings of paying a family member a salary, it is important not to overlook NIC which is payable by both employees and employers. Of course by virtue of being a company director, they are effectively also the employer, so with employers NIC being a direct cost to the business caution need be taken when establishing annual salaries for family members, to ensure the full NIC cost has been considered.


As a consequence of the NIC costs, it is often decided that the current optimum annual salary to be paid to the family member for the 2021/2022 tax year is £9,586, as this amount gives a corporation tax saving which still outweighs the net cost of any NIC.


Practical points


● The family member should be added to the company's payroll in the same way as a “normal” employee.

● If a salary is to be paid to a family member, then the physical payment should be paid into the family member's personal bank account.

● If the family member is also a director / shareholder then you should also look to pay some of their remuneration by way of dividends in line with the number of shares held and share type the family member owns in the company.

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