The Benefits of Employing your Children in your Business
As a sole trader or a small company owner there are many financial and non-financial benefits to employing your children in your business
The income to your child will be a cost to your business and these will be tax deductible. If you are a sole-trader then your taxable profits will fall and you will save tax at the rate at which you are paying it.
Say you pay your children £50 per week (£2,600 a year) to work part-time in your business, this will mean:
- Your profits will fall by £2,600. Thus your tax and national insurance will fall, for a higher rate tax payer they will fall by 42% (£1,092). Thus the true cost to you will be £1,508.
- If these are their only earnings then they will not pay any tax or national insurance on this. For 2012/13 they can earn £8,105 without paying tax. If they are below the age of 16 there will be no national insurance contributions needed by them or you as the employer.
Limited Company Owner
A limited company will save tax at 20% (assuming the profits are below £300,000). Assuming the child is below the age of 16 there will be no national insurance to pay by you as the company owner.
The child will also obtain an income, generally tax free- as above.
The decision that is taken is based on the overall wealth of the family. If you had to pay the wages anyway and your child is effectively replacing wages that you would have incurred then you are no worse off but the family unit is earning more and paying less tax. If you were not to incur these costs but are employing the child for other none financial reasons then the family as a unit is better off but income has moved from the parent to the child.
For obvious reasons there are strict rules when it comes to employing children, these are summarised as follows:
- With some limited exceptions for specific jobs (e.g. acting or modelling) it is generally illegal to employ children under the age of 13.
- For 13 years olds the rules depend on the local by-laws. Some areas allow them to do limited work, some allow them to do the same work as a 14 year old and some do not allow them to work at all.
- Children under school leaving age (other than those above) may do ‘light work’ (e.g. office work) provided that it does not interfere with their education or affect their health and safety. Certain types of work (e.g. factory work) are prohibited. Any business employing children under school leaving age must obtain a permit from the local authority.
- Subject to these points, children still attending school can work up to two hours most days. On Saturdays and weekdays during school holidays this is increased to eight hours (five hours if under 15). Working hours must fall between 7am-7pm and are subject to an overall limit of 12 hours per week during term time or 35 hours during school holidays (25 hours if under 15). The child must also have at least 2 weeks of uninterrupted holiday each calendar year.
- 16 and 17 year olds over compulsory school age can generally work up to 40 hours per week and can do most types of work, although some additional health and safety regulations apply.
- 18 year olds and older are mostly subject to the same employment rules as anyone else, including working time directives.
How much can you pay them?
The salary paid to the child must be justifiable by the amount of work that they actually do for the business. If you employ your 16 year old son for office duties you could not justify a salary of £40,000!
You need to bear in mind the national minimum wage rates. These apply for anyone aged over 15 and are of course at reduced rates for anyone under the age of 21.
Other than that there are no set guidelines. The amount that you pay must be justifiable and generally would be the amount you would pay a none connected third party with the same level of experience to complete the same job.
Apart from the obvious financial considerations you may want to employ your children for other reasons, such as:
- Early preparation for them taking the business over.
- Installing a good work ethic into them.
- Giving them control over their finances and ensuring they adopt budgeting skills from an early age.
- Give them something productive to do with their time