Boosting Your Company's Cash Flow: Paying a Family Members a Salary

One savvy way to cut your company's tax bill and maximize your cash flow is by putting family members on the payroll. These family members can include your spouse, civil partner, or even children in college.

But, it's not just about the tax benefits. Employing a spouse or civil partner can also help them accrue National Insurance credits for their state pension and make your company contributions to a private pension plan.

However, tread carefully to avoid falling into the "settlements" trap, a tax regulation aimed at preventing income splitting between directors and family members with lower tax rates. This isn't just about trusts; it encompasses any financial arrangement.

To sidestep this, your family member must receive an "outright gift" of income-producing assets without a substantial right to the income. Past HMRC investigations have hinged on the same principle, but most cases have now been put to rest.

The salary you pay your family member should reflect the work they genuinely perform. Overpaying for minimal work may draw HMRC's attention and could be disallowed as a tax deduction.

Appointing your family member as a director can help you pay a modest salary, even if their actual workload is limited.

The "optimal" salary for 2023/24 is £12,570, as it avoids employee NICs and provides a corporation tax deduction that outweighs the employer NICs due. This also ensures your family member accumulates NIC contributions for their state pension.

Remember to pay the salary into their personal bank account, record it as payment to an employee in your accounts, and meet Real Time Information payroll scheme requirements.

If your family member is also a shareholder, you can take advantage of further withdrawal options. Boost your company's cash flow while staying tax-compliant with this smart strategy.