Within family businesses it is common for family members to be involved in the day to day running of the family business. It is therefore worthwhile to consider the tax rules regarding the remuneration of each family member.
Most UK individuals benefit from a Personal Allowance, which enables them to earn a proportion of income each year completely tax-free. For the current 2021/22 tax year the Personal Allowance is £12,570. There are also other tax reliefs to consider such as the £2,000 tax-free Dividend Allowance.
Where couples who are married or within a civil partnership run a business together, it is essential to ensure each partner’s basic rate band is maximised. For basic rate taxpayers whose remuneration consists wholly of dividends, a couple may earn up to £100,540 and only pay tax at a rate of 7.5%.
When children also participate in the running of the business tax savings can increase even further.
It is therefore important that family businesses use the personal allowance and tax bands efficiently by utilising the personal allowance and basic rate band for each family member.
Anti-avoidance rules exist that prevent a parent from diverting income to a child in order to utilise the child’s personal allowance. If a parent provides funds to a child, even via a trust, income arising from these funds is taxed in the hands of the parent. These rules only apply to parents and not to a siblings or grandparents as long as the child is under 18 years old and unmarried.
However, under certain circumstances children’s wages are allowable if it is not unreasonable for a child to be employed to undertake the particular work and the payment is in fact in the nature of the wage and not merely “pocket money”.
Last but not least…
Finally, where you have no control over who earns what there is the marriage couples allowance. This allows spouses or civil partners to transfer £1,260 of their personal allowance to the other resulting in a tax saving of up to £252 in the 2021/2022 tax year. The general rules for claiming this relief are that the lower earner’s income is within the personal allowance (£12,570) and the higher earner pays tax at the basic rate.