If you have a family member assisting in the running of your business any salary paid to him/her can be treated as an expense in your accounts. Furthermore, if your family member has no other source of income and you pay them an annual salary of £8,424 (or less) then there will be no Income tax or National Insurance to pay. This can result in a reduced tax bill for the household whether you are running as a Limited Company or as a Sole Trader, as the expense will be deducted from your profits for corporation or income tax respectively.
But how do HMRC view this arrangement, and what can you do to ensure you abide by the rules? Well, whilst HMRC judges your family ties to be completely irrelevant to who you choose to employ, they may wish to establish that the family member hasn’t been placed on the payroll as a means of taking money out of the business. In addition, they may wish to ensure that the work they do gives justification to their salary paid. Essentially HMRC state that there should be no special treatment in terms of pay or treatment. Therefore, you must be able to justify the family member’s salary in relation to the work they are doing.
You should not take any shortcuts in the employment of a family member. For example ensure their salary is paid, use a contract of employment, check if you need to provide them with a workplace pension scheme etc. These tasks may seem trivial when dealing with a family member, however completing them will help prevent any potential doubt from HMRC about the legitimacy of their employment.