Paying salaries to your children is a good way to reduce your taxable profits but which children can you legally employ?
With some limited exceptions, it is generally illegal to employ children under 13. The position for 13 year olds depends on 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 may do ‘light work’ (ie office work) provided that it does not interfere with their education or affect their health and safety. Certain types of work (ie factory work) are prohibited and any business employing children under school leaving age must obtain a permit from the local authority. Subject to this, children still attending school can work up to two hours a day. On saturdays and weekdays during school holidays this is increased to eight hours (five hours if aged under 15). Working hours must fall between 7am and 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 aged under 15). The child must also have at least two 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. In essence you can generally employ any of your children aged 13 or more and pay them a salary which is deductible from your own business income.
How much can you pay?
A salary paid to a child must be justified by the amount of work which they actually do in your business. If you employed your 15 year old daughter to answer your office phone one hour each evening, you could not justify paying her a salary of £30,000 but a salary of, say, £1,500 should be acceptable.
The National Minimum Wage applies to any employee aged 16 or more, with reduced rates for those aged under 21 or undergoing training.
However, there is no fixed rate of pay which applies to children. The rate paid must, however, be commercially justified – in other words, no more than you would pay to a non-family member with the same level of experience carrying out unskilled work, the national minimum wage for 16 to 17 year ods (£3.68 per hour) represents a good guide. Where the child has some experience, or the role requires some skill, a higher rate will often be justified.
Assuming that a rate of £5 per hour can be justified, the maximum salaries which a child could earn would be approximately as follows:
13/14 year olds £3,780
15+ but still school age £4,380
Over school age but under 18 £10,400
Subject to this, a salary of up to £7,475 could be paid tax free to a child aged under 16 with no other income. For those aged 16 or more, any salary in excess of £7,075 will give rise to employer’s National Insurance at 13.8% and any salary in excess of £7,225 will also give rise to employee’s National Insurance at 12%.
There are several different ways to save tax by effectively passing some of your business income directly to your children. It is vital to remember that the income must be the child’s to keep. Any arrangements requiring the child to pass the income back over to you will mean that the planning is ineffective and the income is taxed on you.
