Are Wages Paid to Family Members Tax-Deductible?

WagesPaid to Family Members Tax-DeductibleWhat Does ‘Wholly and Exclusively’ Mean?

For wages to be a legitimate business expense, they must be paid ‘wholly and exclusively’ for the business. In other words, your child actually has to do the job, and the amount they’re paid needs to be reasonable. HMRC keeps an eye on this to prevent disguised gifts being claimed as business expenses.

Paying a Fair Wage

If you decide to pay a family member, it’s important to ensure that their wage is in line with what someone else would earn for the same work. HMRC will check whether their pay is excessive compared to market rates. If they find it's too high, they could disallow part or even all of the expense.

To stay on the right side of the rules, keep records of their tasks, the hours worked, and how you arrived at their pay rate. Having a proper time sheet or clear payment structure makes it easier to justify the expense if HMRC ever asks.

Cases Where HMRC Stepped In

There have been cases where HMRC challenged wage payments to family members. For example, in Nicholson v Revenue and Customs (2018), a self-employed father paid his university-aged son wages, but there was no clear link between the work done and the payments. The tribunal ruled the payments were actually a way of financially supporting his son rather than genuine wages — so the entire expense was disallowed.

In other cases, such as Scott & Ingham v Trehearne (1924) and Johnson v CIR (1919), HMRC found that part of the wages paid to family members were excessive and only allowed aportion as a tax-deductible expense. These cases highlight why it’s important to document the work performed and pay a fair wage.

Making Sure You Stay Compliant

If you want to pay wages to a family member without running into problems, here are some things to keep in mind:

• Pay a reasonable rate based on industry standards or the National Minimum Wage.
• Keep records of the tasks they complete and how many hours they work.
• Consider putting them on the payroll and issuing payslips.
• Avoid lump-sum payments that don’t match the work done, — HMRC could see them as gifts.
• If you’re unsure, speak to Zeus Accountants to make sure everything is above board.

Final Thoughts

Hiring a family member can be a smart move for both your business and them, but it’s essential to do it properly. As long as their wages reflect genuine work and are documented correctly, you can claim the expense without worry. If you need advice on setting this up the right way, our team at Zeus Accountants is happy to help.

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