One of our client wanted to put his teenage son on the company payroll to help him with his finances, but was worried what HMRC would say about this. Can his company claim a tax deduction for his son’s wages?
We’ve heard it a thousand times in a hundred different ways, “I’ll get the company to pay so it can claim a tax deduction”. Using the company cheque book to pay a non-business expense won’t make it tax deductible. On the other hand, don’t write the idea off completely. Meeting a cost that benefits you in some way doesn’t automatically rule a tax deduction out.
The Wholly and Exclusively Rule
Companies can’t claim tax deductions for expenses unless these are incurred “wholly and exclusively for the purpose of the trade”. It’s often thought that this rule can lead to trouble where you pay a member of your family. For example, you might employ your son or daughter just to give them work experience they can put on their CV or to give them some cash in their pocket. Clearly there’s an advantage for you and them, but does this break the wholly and exclusively rule?
Relationships Don’t Matter
To answer the question above you don’t need to look at what you or your youngsters get out of the arrangement, but what your company gets out of the deal. HMRC’s internal guidance manual (BIM47105) explains it this way: “So where there is “equal pay for equal value” the amount paid is fully allowable, notwithstanding any connection between payer and recipient”.
Value For Money
So thinking of our subscriber’s situation he needn’t worry about employing his son through the business; his company will be entitled to a tax deduction for his son’s wages, as long as the amount of salary is at an appropriate level for the type of work done.
Create a Job
There’s no reason you can’t pay your son or daughter to sweep the company car park, clean its vehicles or even help with IT. With some creative thinking we’re sure you could find 101 tasks.
Tip. You can create a role for your son or daughter without troubling HMRC as long it serves a function for your company. What’s more, not only will it get a tax deduction for the cost of paying your youngster, it’s tax efficient for you.
Extra Tax Savings
If your company pays your children, you’ll have to find less out of your own pocket to support them. This can make a big difference; where you pay them the money will originate from salary or other income on which you’ve paid tax and NI, but where your company pays them, these deductions won’t apply.
Example. You pay your two youngsters pocket money of £40 per month each. That’s £960 a year. As a 40% taxpayer this takes £1,655 of your salary (£1,655 less tax at 40% of £662 and NI at 2% of £33). If, instead, your company pays them, the cost to you directly will be nil. Plus, because their pay is tax deductible the cost to your company is just £768. That’s less than half the cost of pocket money, and what’s more you’ve got a few chores done around the factory or office.
You can create a job for his son, e.g. sweeping the company car park, and HMRC won’t object. The company is allowed a tax deduction for his wages as long as it pays no more than the going rate for the work he does. This arrangement is a tax-efficient alternative to pocket money