How it works

One of the most efficient methods of reducing a company’s tax bill and increasing the amount of cash withdrawn at the same time is by paying a salary to a member of the directors’ family. Such members can be the director’s spouse/ civil partner or children at university for example.

How much to pay

In order to qualify as a deduction against the company’s tax on its profits, the family member needs to be ‘really’ earning the amount that is paid to them.

  1. The amount paid must be in return for the work they undertake. If no work or little work is undertaken then HMRC could refuse the company a tax deduction and treat the payment as a distribution to the director.
  2. Paying a spouse or civil partner say, £50,000 a year for one days’ work a week might possibly be challenged by HMRC and if upheld would result in the expense being disallowed as not being incurred ‘wholly and exclusively.
  3. The salary must be reasonable for the work undertaken – a salary greater than would be paid to another non-family member to do the work could be investigated by HMRC.
  4. By appointing the family member as a director a small salary could be paid, even if the actual work undertaken is little.


Tax Tips

  • Optimal’ salary amount, namely that although NIC is not payable by the employee on £9,568, the employer is liable for NIC of an amount in excess of £8,840 (i.e. £100.46).
  • Corporation tax relief is available at 19% on the whole amount of salary plus employer’s NIC then the corporation tax deduction outweighs the amount of NIC due such that for 2021/22
  • The salary should be paid into the family member’s personal bank account and be recorded in the accounts as payment to another employee; the company will also need to comply with the Real-Time Information requirements of a payroll scheme.
  • Should the family member also be a shareholder there will also be the option of withdrawing more from the company if needs be.