Family Wages: Getting it Right

By Wingate Accountants

Paying family members through your business can be a smart way to reduce overall tax liability—if done correctly. However, when handled without due care, it can lead to costly mistakes and scrutiny from HMRC.

Why Consider Paying Family Members?

In a family-run business, spreading income across family members can make good tax sense. It allows:

Use of each individual’s Personal Allowance;
Access to nil-rate and lower-rate tax bands;
Potential savings on the overall tax bill.

“Family” may extend to anyone financially dependent on the business owner, but this flexibility comes with strict conditions and anti-avoidance rules.

What to Watch Out For

When paying family members, bear in mind:

Wages must be justifiable in relation to duties performed.
NIC thresholds apply: In 2024/25, earnings above £242/week triggered National Insurance.
Parental gifts: Investment income of children derived from parental gifts is taxable on the parent.

Case Study: Nicholson v HMRC (2018)

In this Tribunal case, Mr. Nicholson employed his son to assist with online marketing and leaflet distribution. The son was paid £10 per hour for 15 hours weekly.

However, Mr. Nicholson:

Failed to provide a clear payment trail.
Partially paid in kind (e.g., food, drink, university support).
Did not keep proper time logs or bank evidence of wage payments.

Tribunal’s Verdict: The payments were ruled non-deductible as they were made out of parental affection, not strictly for business purposes. The claim was denied.

How to Get it Right

Pay a Commercial Rate
The wage should reflect market value for the work performed. Use the principle of equal pay for equal value.
Record Hours Worked
Maintain timesheets or logs showing when and what work was done.
Use a Clear Payment Methodology
Pay directly from the business account into the family member’s bank account. Avoid payment in kind (e.g., food, university fees).
Retain Supporting Documents
Keep contracts, timesheets, payment logs, and job descriptions. Bank statements can provide vital proof of actual wage disbursement.

Practical Tip from Wingate Accountants

To successfully claim a tax deduction on wages paid to family members:

Ensure that the payments are exclusively for business purposes.
Document everything—time worked, payment rates, and the transfer trail.
Avoid dual-purpose payments that can be construed as personal support.

By keeping proper records and following commercial practices, you’ll strengthen your tax position—and stay on the right side of HMRC.

If you’re unsure how to structure family employment within your business, our team at Wingate Accountants can guide you through it. Contact us today for a no-obligation consultation.