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Employing family members - Can family assistance be tax deductible?

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22 May 2012

Help from family members in farming businesses is a common occurrence. It may be possible to structure this in a tax efficient manner.
 
Ensure that amounts paid can be justified

Family members can be paid the market rate for any work they undertake for a business, whether the business is a limited company or an unincorporated business such as a partnership or sole trade.

A partner cannot be paid a tax deductible "wage" for work undertaken for a partnership in which they are a partner, but a tax deduction could be available for services they provide to a partnership from another business that they own.

When employing family members it must be ensured that the amounts paid are the market rates for the work carried out, and are the same as would be paid to an unconnected individual.

What are the tax benefits?

As each individual is entitled to a tax free personal allowance of £8,105 for the year ended 5 April 2013, it can be possible to obtain a tax deduction for amounts totalling £8,105 paid to a son or daughter who is, for example, in full time education but also works in the family business. If they have no other income, such as bank interest, they will not suffer any income tax on the amounts received.

To avoid incurring a National Insurance liability in respect of an individual over the age of 16, amounts paid should not exceed approximately £144 per week.

For a partnership or sole trader where the business owners are 40% taxpayers, paying total wages of approximately £8,000 to a family member who is not a taxpayer will achieve a tax saving of at least £3,200 (£1,600 where the business owners are 20% taxpayers).

Going forward

Help from family members in farming businesses is a common occurrence. It may be possible to structure this in a tax efficient manner. It must be ensured that any amounts paid to family members can be justified, in order to obtain a tax deduction.

If you would like to discuss tax planning issues, please contact Nick Dee or Peter Griffiths on 01242 680000.