For many SME owners, the day-to-day running of a business is varied and requires one person to juggle many responsibilities.
From bookkeeping and business development to marketing and admin, SME owners can be scrambling to keep up.
If your children have a particular interest in a part of the business, or are skilled at certain tasks, employing them can help take some of the work off your plate.
While children are often remunerated informally, such as through pocket money or an allowance, there are some potential tax benefits of employing them through a business.
What are the rules around 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 aged 13 to 16 years old, they are not entitled to be paid the National Minimum Wage and they do not need to be included on payroll unless their total income exceeds the Personal Allowance.
However, children aged 16 years and older are entitled to the National Minimum Wage and their wages will generally need to be processed through payroll.
In addition, you will also need to make PAYE deductions if they are earning over £123 per week.
In terms of working hours, children are prohibited from working during school hours and can only work 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 benefits?
Each person in the UK has a tax-free personal allowance of £12,570. This means a salary up to this threshold may not incur any tax liabilities, provided the child has no other income.
At the same time, salaries are generally a deductible business expense, which can lower a business’s taxable profits.
For limited companies, that reduces Corporation Tax, while sole traders or partnerships can reduce profits that may otherwise be subject to Income Tax.
There are also some potential National Insurance (NIC) benefits. Children aged 16 or under are not required to pay NIC and their employers typically do not have to pay for children below this age.
After a 16th birthday, a child begins to pay NIC, but contributions only apply to earnings above a certain amount.
The Employment Allowance may cover some of the Employer NIC, which is otherwise charged at 15 per cent on pay over £5,000.
How can you stay compliant?
When employing your children in a family business, it must be done on a wholly commercial basis.
HMRC is accepting of family members working within a business, but the job must be real and justified, as opposed to fabricating tasks or remunerating 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 raise eyebrows with HMRC.
Failure to meet the requirements could lead to HMRC disallowing the wage expense and your business incurring additional liabilities and potential penalties.
Wages 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
Aside from supporting the business, part-time work can help children gain valuable work experience, develop practical skills and build financial discipline.
Our accountants can help assess whether there is a potential for saving, while ensuring employment remains compliant.
We can advise on appropriate salaries and create a clear HMRC paper trail, offering alternative tax planning options where applicable.
Considering hiring one of your children? Speak to an accountant for guidance on employment rules and tax planning.
