Why should family businesses employ their children?

With many responsibilities involved in the day-to-day running of a business, from bookkeeping to business development, SME owners can be scrambling to keep up.

If your children are looking to earn some extra money and begin to build useful work experience, offering them employment can help take some of the work off your plate.

Children are often remunerated informally, such as through pocket money or an allowance, but there are several commercial and tax benefits associated with employing them as genuine workers within a family business.

How can you stay compliant when employing your children?

While the law permits children to work part-time from the age of 13, there are rules in place to protect young workers.

For children between the ages of 13 and 16 years old, there is no entitlement to be paid the National Minimum Wage.

In most cases, they only need to be included on payroll if their income exceeds the Personal Allowance.

On the other hand, children aged 16 years and older are entitled to the National Minimum Wage and their wages will generally need to be processed through payroll.

You will also need to make PAYE deductions if they are earning over £123 per week.

Regarding working hours, children are prohibited from working during school hours, with a maximum of two hours on school days and Sundays and up to eight hours on a Saturday.

Any child undertaking part-time work is prohibited from working in transport, factories, construction sites, mines and merchant ships.

What are the tax efficiencies of employing children?

As every person in the UK has a tax-free personal allowance of £12,570, a child’s salary up to this threshold may not incur any tax liabilities, provided they have no other income.

At the same time, salaries are generally a deductible business expense, which can lower a business’s overall taxable profits.

For limited companies, a child’s pay can reduce Corporation Tax, while sole traders or partnerships can reduce profits that may otherwise be subject to Income Tax.

Elsewhere, there are also some potential National Insurance (NIC) benefits.

If your business is employing a child under 16 years old, neither the child nor the employer is liable to pay NIC contributions.

After a 16^th birthday, a child begins to pay NIC, but contributions only apply to earnings above a certain amount.

The Employment Allowance may offset some or all of your employer National Insurance liability, which is typically charged at 15 per cent on pay over £5,000.

How can you stay compliant?

If you are planning to employ your children in your family business, it must be done on a wholly commercial basis.

The job must be real and justified, as opposed to fabricating or exaggerating tasks or remunerating children for everyday chores.

Children must be paid a reasonable market-rate pay which is in line with the work done and reflective of the wage of an unrelated person of a similar age and skill.

For example, if your child was paid substantially but had minimal responsibilities within a business, this would likely lead to HMRC scrutiny.

Without meeting these requirements, HMRC could disallow the wage expense and your business could incur additional tax liabilities and potential compliance penalties.

Any wages paid must be processed through Pay As You Earn (PAYE) and paid directly into the child’s own bank account.

It is good practice to keep records of hours worked, the duties performed and evidence of completed tasks to prevent any mishaps during an HMRC review.

Speak to an accountant

Beyond supporting your business, part-time work can allow children to gain important work experience, develop financial awareness and build transferable skills.

Our specialists can help evaluate whether there is a potential for tax saving, while ensuring child employment remains compliant.

We can advise on proportionate salaries and create a direct HMRC paper trail, suggesting bespoke tax planning options to suit your commercial needs.

Considering hiring one of your children? Speak to an accountant for guidance on employment rules and tax planning.