My mate says… ‘I can reduce my tax bill by paying wages to my spouse and family’.
The answer to this is yes and no!
As with any expenses for a self-employed person they must be wholly and exclusively for the purposes of the trade.
So, if you employ a spouse any claim for their wages must be commensurate with the duties they carry out, the hours worked and must also be in line with what would be expected if an unconnected person were employed to do the work. So, for example if your spouse worked part time in your business carrying out general administration duties and you paid them a salary of £40,000 a year HMRC would consider this to be excessive and would be likely to disallow the claim. Also, one other crucial point is that the wages must actually be paid. A transfer to an account in the spouse’s name or a joint account would suffice but not a transfer to the business proprietor’s own solely named bank account as HMRC would consider this drawings and the claim would be likely to be disallowed.
Payments for wages to children must also follow similar principles and caution is needed if wages are paid to minors to ensure that working regulations are not breached. Again, the rate of pay must be in line with the work carried out but be careful not to pay at a level that HMRC would be likely to consider this “pocket money”.