There’s a common misconception among business owners: many believe they can simply add family members to the payroll and start paying them without proper procedures. However, HMRC has become increasingly vigilant about family employment arrangements, with targeted compliance activities expected to increase in 2025.
When done properly, employing family members can be a legitimate and effective tax planning strategy. This guide will help you navigate the requirements to satisfy HMRC while maximising the tax benefits for your business.
Why HMRC Is Paying Attention
According to recent reports, HMRC is investing £1.6bn over five years to fund the recruitment of 5,000 additional compliance officers, with the first 200 already in place as of November 2024 (accountancydaily). With the tax gap estimated at £39.8bn, family employment arrangements that appear artificial are likely to face increased scrutiny.
The Benefits When Done Properly
When structured correctly, employing family members offers significant advantages:
- Utilises personal allowances: Each family member can earn up to £12,570 tax-free in 2025/26
- Reduces business profits: Legitimate wages are tax-deductible expenses
- Keeps income within the family: Rather than paying higher rates of tax on all income
- Creates pension planning opportunities: Company contributions aren’t subject to National Insurance
- Potentially saves thousands: See our case study below
HMRC’s Key Requirements
HMRC isn’t opposed to family employment, but they insist on one crucial requirement: the work must be genuine, necessary, and actually performed. This means:
- Family members must actually do the work they’re being paid for
- Payment should be reasonable for the work performed (market rate)
- Proper documentation is required (as with any employee)
- Money must actually be paid to them (not just on paper)
Common Myths vs. Reality
| Myth | Reality |
| “I can pay my spouse without them doing any work” | HMRC requires genuine work to be performed and can challenge arrangements where no actual work is done |
| “I can pay family members whatever I want” | Payments must reflect market rates for the work performed |
| “Family employment doesn’t need formal documentation” | You need the same documentation as for any employee |
| “HMRC doesn’t check family employment arrangements” | HMRC has increased compliance activity in this area for 2025 |
Setting Up Proper Employment
To satisfy HMRC requirements:
1. Create proper documentation
- Written employment contracts
- Clear job descriptions outlining actual duties
- Regular payment through payroll
- Holiday and absence records
- Evidence of work completed (timesheets, emails, work product)
2. Set appropriate pay levels
- Research market rates for similar positions
- Document how you determined the appropriate salary
- Ensure the pay reflects hours worked and responsibilities
3. Follow normal employment procedures
- Process payments through PAYE
- Deduct appropriate tax and National Insurance
- Comply with National Minimum Wage requirements (£12.21/hour for those 21+ from April 2025)
- Issue payslips
2025/26 Tax Rates and Thresholds
The standard employee personal allowance for the 2025/26 tax year remains at:
- £242 per week
- £1,048 per month
- £12,570 per year
England and Northern Ireland Income Tax Rates
| Tax Rate | Annual Earnings |
| Basic rate (20%) | Up to £37,700 |
| Higher rate (40%) | £37,701 to £125,140 |
| Additional rate (45%) | Above £125,140 |
National Insurance Thresholds 2025/26
| Threshold | 2025/26 Rate |
| Lower earnings limit | £125 per week / £542 per month / £6,500 per year |
| Primary threshold | £242 per week / £1,048 per month / £12,570 per year |
| Secondary threshold | £96 per week / £417 per month / £5,000 per year |
Source: GOV.UK, 2025
Which Family Members to Consider
Spouses and Civil Partners
Particularly tax-efficient if they’re not using their full personal allowance or are in a lower tax bracket. Suitable for roles like bookkeeping, administration, or marketing.
Children (14+)
Can legitimately work part-time or during holidays. Remember that normal employment law applies, including National Minimum Wage for those 16 and over.
Parents or Other Relatives
May bring valuable skills while creating tax-planning opportunities. Parents approaching retirement might welcome extra income that builds up their National Insurance contributions.
Beyond Salaries: Pension Opportunities
An often-overlooked benefit is the opportunity to contribute to family members’ pensions:
- Company pension contributions aren’t subject to National Insurance
- They reduce your corporation tax bill
- They build retirement wealth within the family
- For 2025/26, employer contributions of up to £60,000 can be made annually
Remote Work Considerations
With hybrid and remote work now common, family employment arrangements have evolved:
- Document home office arrangements clearly
- Ensure family members have appropriate equipment and workspace
- Maintain regular communication and work records
- Consider how to demonstrate supervision and management
Implementation Timeline
| Timeframe | Action |
| 3 months before year-end | Review potential family roles and tax position |
| 2 months before | Draft employment contracts and job descriptions |
| 1 month before | Set up payroll and HMRC registration |
| Start of employment | Complete right-to-work checks and onboarding |
| Monthly | Process payroll, maintain timesheets |
| Quarterly | Review work performed and documentation |
| Annually | Review arrangements and adjust as needed |
Family Employment Checklist
✓ Is the family member performing genuine, necessary work?
✓ Is their pay comparable to market rates?
✓ Do you have proper employment documentation?
✓ Are you processing payments through PAYE?
✓ Can you evidence the work being performed?
✓ Are you complying with employment laws?
✓ Have you considered pension opportunities?
Next Steps
If you’re considering employing family members:
- Book a Family Employment Review: Until April 30th, we’re offering a complimentary 30-minute consultation to assess your specific situation.
- Consider a formal tax planning session: For complex situations, a comprehensive tax planning session can identify additional opportunities.
Remember, employing family members isn’t about creating artificial arrangements – it’s about recognising and properly rewarding the real contribution your loved ones make to your business success while ensuring full compliance with HMRC requirements.
This article was last updated on March 25, 2025, with the latest tax rates and thresholds for the 2025/26 tax year. For personalised advice on your specific situation, please contact our office.
