How to employ your spouse, partner or other relatives correctly through your business

Iftiaccounting.com/limited-company/) or a growing business, you may have wondered whether you can employ your spouse, partner or another family member.

It is one of the most common questions accountants are asked, and it is easy to see why. If a family member already helps with administration, bookkeeping, customer service or marketing, it may be reasonable for the business to pay them for the work they perform.

The good news is that you can employ family members in your business.

However, the arrangement must comply with the same tax, payroll and employment rules that would normally apply when employing someone who is not related to you. Simply paying a spouse, child or other relative to reduce your tax bill, without them genuinely working for the business, could create problems if HMRC examines the arrangement.

This guide explains how employing family members works, what HMRC may expect to see and how to structure the arrangement correctly.

The short answer

A limited company can employ a spouse, civil partner, son, daughter or other family member, provided they genuinely carry out work for the business and receive reasonable pay for the duties they perform.

The salary should:

• Reflect the work completed
• Be commercially reasonable
• Comply with National Minimum Wage requirements where applicable
• Be processed correctly through payroll
• Be paid to the family member
• Be supported by appropriate employment and working records

Where the arrangement is genuine and the cost is incurred wholly and exclusively for the company’s trade, the company may be able to deduct the salary and associated employment costs when calculating its taxable profits.

Can I legally employ family members?

Yes.

There is no general rule preventing a company from employing relatives.

Many successful family businesses employ:

• Husbands and wives
• Civil partners
• Unmarried partners
• Adult children
• Parents
• Brothers and sisters
• Other close relatives

The key issue is not the family relationship. The important question is whether a genuine employment relationship exists.

The family member should have identifiable responsibilities, agreed working arrangements and evidence showing that they perform the work for which they are being paid.

Does the family member have to do real work?

Yes.

Anyone receiving a salary from the company should genuinely perform work that provides value to the business.

Examples of legitimate duties may include:

• Bookkeeping
• General administration
• Raising and processing invoices
• Answering telephone calls
• Managing emails
• Responding to customer enquiries
• Marketing
• Social media management
• Payroll administration
• Stock control
• Scheduling appointments
• Filing paperwork
• Updating customer records
• Organising business documents

The duties should be appropriate for the family member’s skills and should reflect what they actually do.

It is not enough to create a job title on paper without the work being carried out in practice.

What does “reasonable pay” mean?

The salary should be commercially reasonable for the work performed, the hours worked and the person’s level of responsibility.

For example, if your spouse spends five hours each week managing invoices and responding to customer enquiries, a salary based on those duties may be reasonable. Paying them the equivalent of a full-time senior executive salary for a few hours of basic administration would be much harder to justify.

When deciding what to pay, consider:

• The number of hours worked
• The nature of the duties
• The level of skill or experience required
• The salary you would pay an unrelated person
• Relevant National Minimum Wage or National Living Wage requirements
• Salaries paid for comparable roles

The family-member exemption from the National Minimum Wage does not normally apply where the employer is a limited company. A company is a separate legal entity and cannot itself have a family relationship with an employee.

The salary should therefore not only be reasonable for tax purposes but also comply with employment law.

What evidence should the company keep?

Good records help demonstrate that the arrangement is based on genuine work rather than being created purely for tax purposes.

Depending on the role, useful records may include:

• A written statement of employment particulars
• A fuller employment contract
• A job description
• Agreed working hours
• Timesheets
• Records of tasks completed
• Emails sent or managed
• Customer service records
• Marketing work or social media posts
• Payroll reports
• Payslips
• Bank payments
• Holiday and absence records
• Pension assessments

The salary should normally be paid into the family member’s own bank account. Merely recording a salary in the company’s accounts without making the payment may weaken the commercial substance of the arrangement and can create additional tax-timing issues.

Read Merranti’s guide to the records businesses should keep for HMRC for more information about maintaining suitable supporting evidence.

Does my family member need an employment contract?

An employer must provide employees and workers with a written statement setting out the main conditions of their employment when they start work.

The principal statement should be provided on the first day of employment. Further required information must generally be provided within two months.

The documentation should normally cover matters such as:

• The employer’s name
• The employee’s name
• The job title or description of the work
• The employment start date
• Hours and days of work
• Salary and payment frequency
• Holiday entitlement
• Sick pay arrangements
• Notice periods
• Pension arrangements
• Disciplinary and grievance procedures

A written statement of employment particulars is not necessarily the same as a full employment contract. However, preparing a proper contract alongside the required written statement is usually sensible, particularly where the individual has regular responsibilities or access to confidential business information.

Family businesses can sometimes become overly informal. Proper documentation protects both the company and the family member if responsibilities, working hours or personal circumstances change.

How should the salary be paid?

Where payroll reporting is required, the family member should be added to the company’s payroll in the same way as another employee.

The business may need to:

• Register as an employer
• Obtain the employee’s personal and tax information
• Calculate PAYE Income Tax
• Calculate employee and employer National Insurance
• Issue payslips
• Report payments to HMRC through Real Time Information
• Assess the employee for workplace pension purposes
• Maintain payroll records
• Report statutory payments where applicable

Payroll information generally needs to be reported to HMRC on or before the employee’s payday.

Merranti’s payroll service can help businesses calculate wages, process deductions, submit payroll information and manage ongoing compliance requirements.

Does the salary reduce Corporation Tax?

Potentially, yes.

Where salary and associated employment costs are incurred wholly and exclusively for the purposes of the company’s trade, they will generally be deductible when calculating taxable profits.

This means the company may receive Corporation Tax relief for costs such as:

• Gross salary
• Employer’s National Insurance
• Employer pension contributions
• Other qualifying employment costs

However, a payment is not automatically deductible simply because it has been described as a salary.

HMRC could challenge some or all of the deduction if:

• The family member does not perform genuine work
• The salary is excessive compared with the duties
• There is insufficient supporting evidence
• The payment is primarily personal rather than commercial
• Payroll has not been operated correctly
• The salary has only been recorded and has not actually been paid

The treatment will depend on the facts of the arrangement. You can read more about how business costs affect taxable profits in Merranti’s guide to what counts as a business expense and its explanation of Corporation Tax for company owners.

What about National Insurance?

National Insurance treatment depends on factors including:

• The amount paid
• The employee’s age
• The pay frequency
• The employee’s National Insurance category
• Whether any employment allowance is available to the company

The fact that the employee is related to a director or shareholder does not remove the company’s normal National Insurance responsibilities.

The total cost should therefore be considered before agreeing a salary. A salary that appears tax-efficient may also create employer’s National Insurance, pension contributions and administrative obligations.

Do workplace pension rules apply?

Potentially.

Employers must assess their employees to determine whether they need to be automatically enrolled into a workplace pension.

Eligibility will depend on the family member’s:

• Age
• Earnings
• Employment status
• Normal place of work

Even where automatic enrolment is not required, the employee may still have the right to ask to join or opt into a workplace pension scheme.

Employing a family member does not automatically remove the company’s pension duties.

Can I employ my children?

Potentially, yes.

Adult children who genuinely work for the business can generally be employed in the same way as other employees. The work must be real, the salary must be reasonable and the normal payroll and employment requirements should be followed.

Additional rules apply when employing children who are below school-leaving age or young workers aged under 18.

Depending on their age and location, these rules may cover:

• The types of work they can perform
• The hours and times they may work
• Rest breaks
• Health and safety requirements
• Local authority employment permits
• Restrictions during school terms
• Minimum wage entitlement

A child should not be employed simply to use their tax-free personal allowance. The commercial justification and evidence of the work remain essential.

Should the family member receive employee benefits?

A family member who is genuinely employed may be entitled to the same statutory rights as another employee.

Depending on their status and circumstances, this could include:

• Paid annual leave
• Statutory sick pay
• Maternity, paternity or other family-related leave
• Rest breaks
• Workplace pension rights
• Protection from unlawful discrimination
• The National Minimum Wage or National Living Wage
• Notice rights

The company should not ignore these responsibilities simply because the employee is related to a director or shareholder.

Common mistakes when employing family members

Some of the most common problems include:

• Paying someone who does not actually work for the business
• Paying an excessive salary for limited duties
• Failing to comply with the National Minimum Wage
• Not operating payroll correctly
• Keeping no employment records
• Failing to record hours or duties
• Recording salary without making the payment
• Paying the salary into the director’s account instead of the employee’s account
• Treating personal spending as wages
• Ignoring holiday or pension obligations
• Assuming family relationships remove normal employment rights

These issues may create additional tax liabilities, National Insurance charges, employment-law claims or difficulties if HMRC examines the arrangement.

A practical checklist

Before employing a spouse, partner or other relative, consider whether you can answer yes to each of the following:

• Is there a genuine role that the business needs?
• Does the family member have clear responsibilities?
• Is the salary reasonable for the duties and hours?
• Does the pay comply with minimum wage requirements?
• Has the company prepared the required employment documentation?
• Will the family member be included in payroll correctly?
• Will salary be paid into their own bank account?
• Will the company keep evidence of the work performed?
• Have pension duties been assessed?
• Has the total cost, including employer’s National Insurance, been considered?

If any of these points are unclear, professional advice should be obtained before payments begin.

Frequently asked questions

Can I pay my wife through my limited company?

Yes, provided she genuinely works for the company, receives reasonable pay for the work performed and is employed in accordance with the usual payroll and employment rules.

Can my husband work for my company?

Yes. The arrangement should be genuine, properly documented and commercially reasonable.

Can I employ my unmarried partner?

Yes. A spouse or civil partnership is not required. An unmarried partner can be employed where they genuinely work for the business and the normal employment requirements are followed.

Does the salary reduce Corporation Tax?

A genuine and reasonable employment cost incurred wholly and exclusively for the company’s trade will generally be deductible when calculating taxable profits. The precise treatment depends on the facts.

Does my spouse need a contract?

They must receive the legally required written statement of employment particulars. A fuller employment contract is also advisable.

Does my spouse have to be added to payroll?

This depends on the amount paid and the company’s circumstances, but payroll registration and reporting will commonly be required. The position should be checked before the first payment is made.

Can HMRC challenge a family member’s salary?

Yes. HMRC may challenge the deduction if the work is not genuine, the salary is excessive or the company cannot provide adequate evidence supporting the arrangement.

Can I pay my family member dividends instead?

Dividends and salary are different.

Salary is payment for work and is normally processed through payroll. Dividends are returns paid to shareholders from distributable company profits and must follow company-law requirements.

A family member cannot receive dividends unless they own shares carrying the relevant dividend rights. Transferring shares can also have wider tax and legal consequences, so advice should be obtained before making changes to the company’s ownership.

Final thoughts

Employing a spouse, partner or other family member can be an appropriate way to support your business while ensuring that people who genuinely contribute are paid for their work.

However, the arrangement must reflect commercial reality rather than existing solely to reduce tax.

Clear duties, reasonable pay, proper payroll processing, employment documentation and evidence of the work performed will help demonstrate that the arrangement is genuine.

If you are considering employing a family member, Merranti Accounting can help you:

• Assess whether the proposed salary is commercially reasonable
• Set up and operate payroll correctly
• Consider PAYE and National Insurance obligations
• Assess workplace pension responsibilities
• Maintain appropriate records
• Understand the Corporation Tax treatment
• Structure the arrangement in a compliant and practical way

Written by Steve Watts

Steve Watts is the Accounting Director at Merranti Accounting and a Chartered Management Accountant with the Chartered Institute of Management Accountants. He also holds a CIMA Member in Practice Certificate and has more than 20 years of commercial finance and accounting experience.

Steve qualified as a CIMA accountant in 1995 and has worked across property development, housebuilding, serviced accommodation and investment portfolio management. His experience includes financial strategy, management accounts, business growth, joint ventures, offshore companies and trusts.

At Merranti Accounting, Steve works with company directors and business owners on practical financial and tax matters, including limited-company accounts, Corporation Tax, payroll, VAT, management reporting and business planning. His approach focuses on helping clients understand the commercial impact behind their numbers rather than treating accounting as a year-end compliance exercise.

This article provides general information and should not be treated as personalised tax, legal or employment advice. The appropriate treatment will depend on the specific employment arrangement and the circumstances of the business and family member.