The UK tax system does not allow families to spread the impact of taxation where there is one significant income earner providing for other family members.
For example, if one parent was earning £100,000, they will be paying income tax at 40% rates on almost £50,000 of their income when their partner and teenage children may have no income.
One strategy to consider in these circumstances is sharing taxable income with family members. Generally speaking, this option will only be available to the self-employed or owners of a limited company. If the major income earner is employed by a third-party employer there will be limited options to consider sharing these earnings with family members.
Self-employed options
It is possible for sole traders to convert their business into a partnership with their spouse/partner and divide the business profits between them.
There will be a number of issues to consider before undertaking this strategy:
- It is wise to have a commercial reason for the change.
- Combined tax and NIC savings need to exceed additional costs.
- Professional charges for taking care of a partnership and filing additional tax returns.
Limited company options
A spouse or partner taking shares or a directorship in an existing company will need to consider organising the issue or transfer of shares in the company and thus avoid triggering the ‘settlement legislation’. Settled property would be taxed as if the transfer had not taken place so no tax advantage would be achieved.
Employing a family member in the business
This is a perfectly acceptable strategy as long as there is a sound commercial reason for the appointment and rates of pay are in line with the usual rates for the type of work undertaken.
Other factors to consider if employing family members:
- Have a detailed job description, hours to be worked and rates of pay.
- Make sure that National Living Wage and National Minimum Wage levels are observed.
- There are limitations on the hours that can be worked by younger family members.
- Ensure that pension obligations are considered.
In summary
If you want to see if there is an acceptable way to bring members of your family into your business to reduce your family tax position and increase your family disposable income, we can help you create a feasibility study to quantify these savings. Please call for more information.