Dear Contractor Doctor
I’m a contractor running my own limited company and already pay my husband a salary to handle the company’s administration.
I’d like to update my website and start publishing a blog to help win more contracts, particularly as my skills are quite specialist. One of my kids is really good at web programming, so I am thinking of employing him as our webmaster.
Can I employ my children?
Contractor Doctor says:
“Limited company contractors can certainly employ children over the age of 13 and benefit from corporation tax relief on the salary that they pay,” explains director of client services at contractor accountant Intouch, Clare Rickman.
“However, the tax benefits are small and there are many potential pitfalls, both from a child employment legislation and tax perspective. Unless the contractor’s child can offer a specific high-value skill, then the risks may outweigh the benefits.”
The rules about employing children
According to Rickman, the legislation concerning child employment is quite strict: “Firstly, a child under the age of 13 cannot legally be employed, unless they work in areas such as TV and theatre or modelling.
“Then there are restrictions on the hours that children can work during term time and during holidays. During term time, children can work a maximum of 12 hours per week, rising to 25 hours per week for 13 to 14-year-olds and 35 hours per week for 15 to 16-year-olds during the holidays.”
The local council may also require the contractor to apply for a child employment permit before they can hire anyone younger than school-leaving age, and there are restrictions on the types of work children can do.
Paying a realistic wage and National Minimum Wage
“If a contractor hires one of their own children, they must pay them a realistic salary. A director of a company has a fiduciary duty to do the right thing, which means paying employees what they are worth,” continues Rickman.
“The same principles that apply to hiring a spouse also apply to employing children. So, a 15-year-old being paid £20,000 a year is likely to attract HMRC’s attention, unless the child has an exceptional skill.”
The salary must be the same as if the contractor hired another child to do the same work. Contractors must also pay National Minimum Wage (NMW), which has an amount defined specifically for employees under the age of 18.
Processes and procedures
“The processes and procedures of hiring children are exactly the same as any other employee,” says Rickman. “The contractor needs to complete a P46, add the child to their payroll software and then treat them as a normal employee.”
If a contractor hires one of their own children, they must pay them a realistic salary. A director of a company has a fiduciary duty to do the right thing, which means paying employees what they are worth
Clare Rickman, InTouch
Workers under the age of 16 don’t pay National Insurance Contributions (NICs), and in Rickman’s experience, even 16-year-olds rarely pay NICs because they can’t earn enough to reach the NI weekly threshold, unless they are highly skilled in something.
“Once a child reaches 17 and the child employment rules no longer apply, they are also likely to have a greater range of skills that can legitimately attract a higher salary, so are more likely to pay NICs.”
In theory, a contractor could simply subcontract projects to their child, but then the child would have to fill in a tax return with all the associated paperwork and costs.
HMRC will apply the income shifting rules if it suspects tax avoidance
A child working 12 hours per week at NMW per hour might only be earning about £45 a week, which Rickman highlights is a saving of about £9 of corporation tax. Plus, if the child is properly on the payroll, then HMRC knows exactly what the child is being paid and how old they are.
“If a contractor decides to pay their children above the market rate, they need to be able to justify it, or HMRC will apply the income shifting rules,” warns Rickman. “That means HMRC will simply tax the income given to the child as if it were the contractor’s, so the contractor will have to pay back taxes and interest.
“Depending on how far the contractor was pushing the envelope, HMRC could also decide to add penalties. If, for example, a contractor was paying their three children £10,000 a year to do nothing but use up their tax-free allowances, then HMRC might view this as deliberate avoidance and apply a penalty of up to 100% of the tax owed.”
Company cars and health insurance are also out
The same principle applies to benefits. Rickman explains: “Any employment benefits that a contractor gives to their children must be what an unconnected third party would be paid, if employed by the contractor’s limited company.
“If the child is receiving the benefit purely as a result of their relationship with the contractor, then the benefit will be taxed on the contractor as if it was theirs. So, no company cars, pensions or company funded private health insurance.”
Rickman concludes: “Employing children is something we generally advise caution on. If a contractor’s child is a whizz at creating and managing websites, then employment and the resulting corporation tax relief may be legitimate.
“But contractors should beware of the income shifting legislation and the laws regarding child employment.”