Normally, you will pay pocket money to your children out of your after tax (net) income. Here’s a way to pay them out of pre tax income so reducing the tax bill for your business and yet ensuring no income tax is payable by the recipients.
- Firstly, you should ensure you can legally employ your children, e.g. the child must be at least 14 and may only be able to work 5 or 8 hours on a Saturday (depending on age).
- Check any mimimum wage restrictions - £3.30 per hour for 16 or 17 year olds but no minimum if the children are younger.
- Complete form P46 if they are to be employed for more than 1 week.
Everyone has a personal allowance (currently £5,035 pa) which gives the amount they can earn before any income tax becomes payable. As long as the duties performed by your children are commensurate with their wages your business will get a tax deduction for any amounts paid to them.
If the amounts paid are below the NI limits (currently £97 pw) there will be no NI to pay either!
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Beware of trust traps, not only settlor interested trusts, also new rules for A & M trusts, and finally do not ignore s.34 ITTOIA or s.74 ICTA wages to children are oftern disallowed if excessive.
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