Overview Of Paying Family Members From Your Company
Paying family members from your company with the cost of living rapidly rising, people might be tempted to look for ways to save money and ease the burden on the household budget and debt.
The most effective strategy might be to tighten your belt by seeing where you can make real savings, not by looking for quick wins that have real risks attached.
An area not unknown for company Directors in owner managed businesses to look to make savings to improve disposable income is by putting family members on the payroll. This may well not be an issue if the family member does work for the company.
The tax burden has risen in recent years and currently, if you earn an income of more than £50,270 you will be paying income tax at the rate of 40%. Your personal allowance (the level at which you pay no income tax) is limited to £12,570.
One way that it is not unknown for people to consider seeing if they can improve their bank balance is to pay themselves less and employ other members of their family who are not high earners or perhaps not currently earning an income at all. The thinking might be to take full advantage of the unused personal allowances of other family members and put them on the payroll.
A good idea? Let’s consider this point.
Potential Tax Avoidance Issue When Employing Family Members
Whilst this strategy might appear at first glance attractive it is potentially problematic if the family member is added to the company payroll when doing no work for the company.
Employing a family member to work for a company is treated as a business expense as with any other salaries. However, any such expense is only deductible for tax purposes if it is incurred wholly and exclusively for the purposes of the trade.
If a family member is not working for the company then they should not be on the payroll to help the Directors avoid tax. Tax avoidance is the process of engaging in transactions that obtain a tax advantage or saving. However, whilst tax avoidance does not have the egregious association of tax evasion which is illegal, it can nevertheless be considered unlawful.
Tax avoidance can be ineffective in providing a tax advantage for the taxpayer if arrangements are put in place that have no other purpose other than to avoid tax. Whilst such arrangements may be legally binding HMRC may determine they have no effect on the tax position.
So if a family member cannot demonstrate that they have done anything for a company then they may find their position as an employee should have no benefit as a tax saving for the family. What HMRC might do is to charge the company extra corporation tax by disallowing the salary expense of the unproductive family member planted on the payroll.
Gift Or Salary
The case of David Cation v HMRC [2021] UKFTT 311 (TC) which was highlighted in our article Is It A Gift Or Salary For Tax Purposes? might indirectly highlight the potential perils of an incorrect family payroll strategy.
In that case, a father was said to have done work for his son which if accepted by HMRC would have resulted in a £30,000 reduction in taxable profits. However, when the father was cross-examined on the matter before the Tax Tribunal the explanations provided were rejected along with the tax deduction sought by the son.
The perceived tax saving from putting a family member on a payroll to try to save tax when they do little or nothing for a company is unlikely to be worth the candle. The cost and aggravation that could arise from an HMRC tax investigation could considerably far outweigh any benefit.
Paying Family Members And Liquidation
If at some point after such an arrangement were to be put in place the company were to go into an insolvent Voluntary Liquidation then a Liquidator could conceivably claim that the Director(s) had breached their duty to act in the best interests of the company. This could result in the Director(s) being required to repay after Liquidation all the monies that were received by the family member who was put on the payroll but who did no work for the company.
Elliot Green, CEO of Oliver Elliot says:
Putting family members on the payroll and suggesting to HMRC they are working for the company when they are not simply should not happen. It could and probably would be considered a deliberate act that might be taken seriously by HMRC. It is therefore potentially a classic example of what is cheap risking becoming expensive. Paying family members problems can conceivably be avoided by structuring the ownership of a company in a tax efficient manner which could enable unused personal allowances to be deployed through other family members receiving dividends. What is reasonably required is to take professional advice before acting with excess alacrity.
