Can I employ family members through my limited company?

Many small business owners wonder if they can employ their spouse, children, or other relatives through their limited company. The answer is yes, you can employ family members, provided it is done properly and within HMRC’s rules.

Employing relatives can be a practical and tax-efficient way to share the workload and reward family members who contribute to your business. However, payments must be genuine, commercially justifiable, and correctly recorded to avoid issues with HMRC.

This article explains how to employ family members through your limited company, what tax rules apply, and how to stay compliant.

Is it legal to employ family members?

Yes. There is no law preventing limited companies from employing family members. In fact, it is common in small and family-run businesses. Your spouse, partner, or children can work for your company as long as:

• They carry out real, legitimate work for the business.

• Their pay is reasonable for the duties performed.

• The employment is properly recorded and reported through PAYE.

HMRC allows family employment, but it expects payments to be made on a commercial basis. That means the salary or wage must reflect the type and amount of work done, not simply be used as a way to reduce tax.

Reasons to employ family members

Employing relatives can make good business sense. It allows you to:

• Use the skills and availability of trusted people.

• Keep costs within the family rather than hiring externally.

• Share income more efficiently across family members.

• Build flexibility into the business, especially for small teams.

However, tax efficiency should not be the only motivation. HMRC will look closely at arrangements that appear artificial or designed purely to lower the company’s tax bill.

Paying family members a salary

If you employ a family member, you must treat them like any other employee when it comes to payroll and tax. That means:

• Registering them on the company’s PAYE system.

• Issuing payslips and maintaining payroll records.

• Deducting Income Tax and National Insurance if earnings exceed the thresholds.

• Making employer’s National Insurance contributions if applicable.

Salaries must be realistic. For example, if your spouse or partner helps with admin for a few hours per week, paying them a full-time manager’s wage would not be reasonable.

Paying a market-rate salary keeps you compliant and ensures the company can claim the cost as a legitimate business expense, reducing Corporation Tax.

Employing your spouse or civil partner

Many company directors employ their spouse or civil partner to help with bookkeeping, marketing, or administrative tasks. This is perfectly acceptable as long as the work is genuine and payment reflects the contribution.

You must:

• Keep records of the hours worked and tasks completed.

• Pay through PAYE if earnings exceed the tax-free personal allowance (£12,570 for 2024/25).

• Avoid paying more than the going rate for the role.

Employing your spouse can be tax-efficient because it allows income to be split between two people, each using their personal allowance and lower tax bands.

Employing your children

You can also employ your children, provided they are of legal working age and the work is suitable. The rules depend on their age:

• Children under 13: Cannot legally work.

• Ages 13 15: Can work limited hours outside school time, usually no more than 12 hours per week during term time.

• Ages 16 17: Can work full time once they have left school but are subject to National Minimum Wage and working time rules.

If your child works for your company, you must still:

• Pay at least the National Minimum Wage for their age.

• Register them on payroll if their pay exceeds the lower earnings limit.

• Keep proper records of their work and pay.

Paying your children for genuine work can be tax-efficient, but HMRC will challenge any payment that looks excessive or unsupported by evidence of work.

Tax and National Insurance implications

When you employ family members, all normal payroll taxes apply. This includes:

• Income Tax and employee National Insurance deducted via PAYE.

• Employer’s National Insurance contributions if salaries exceed the secondary threshold.

• Pension contributions if the employee is enrolled in the company pension scheme.

If their income is below the tax and NI thresholds, they may not owe any deductions, but you must still record their employment accurately.

The company can claim the salary as a deductible business expense, reducing its Corporation Tax liability, as long as it is for genuine work.

Record keeping and documentation

To stay compliant and avoid challenges from HMRC:

• Keep employment contracts or written job descriptions.

• Record hours worked, tasks completed, and rates of pay.

• Maintain payroll records and payslips.

• Pay salaries directly into their bank accounts, not as cash gifts.

If HMRC investigates, these records will prove the employment relationship is genuine and the payments are justified.

Common mistakes to avoid

• Inflated salaries: Paying family members more than market value for minimal work.

• Cash payments with no records: Always process wages through payroll.

• Failing to register for PAYE: Even if earnings are low, registration is required in most cases.

• No evidence of work: HMRC expects proof that duties are carried out, such as timesheets or job logs.

Avoiding these mistakes ensures that your company remains compliant and that claimed expenses stand up to scrutiny.

Employing family through dividends

If your spouse or adult children are shareholders in your limited company, they can receive dividends instead of or in addition to a salary. Dividends are paid from post-tax profits and are often more tax-efficient than salaries.

However, they must own genuine shares in the company and be entitled to dividends in line with shareholdings. You cannot issue shares simply to divert income if they do not actively participate in the business, as this could fall under HMRC’s settlements legislation, which targets income shifting between family members.

The role of an accountant

An accountant can help ensure you employ family members correctly by:

• Setting up PAYE and managing payroll.

• Advising on reasonable salary levels.

• Calculating tax and National Insurance.

• Ensuring compliance with HMRC and employment law.

• Structuring income between salary and dividends in the most tax-efficient way.

Professional advice can prevent costly mistakes and give you peace of mind that your arrangements are compliant and beneficial to both your family and your business.

The bottom line

You can employ family members through your limited company as long as the work is genuine, the pay is reasonable, and everything is properly recorded.

Handled correctly, employing relatives can be both practical and tax-efficient, helping you share income, reduce costs, and strengthen your business. By keeping clear records and following HMRC’s rules, you can safely employ family members while staying fully compliant and protecting your company’s financial integrity.