How To Pay Your Child From Your Business: UK Rules Explained
3 December, 2025
Introduction to Family Business Employment
Family businesses form the backbone of economies worldwide, often incorporating multiple generations working together to maintain and grow the enterprise. The strategic inclusion of children within these businesses offers not only operational advantages but also significant tax planning opportunities. According to the Institute for Family Business, family-owned companies represent over 88% of all UK private sector enterprises, contributing substantially to the national economy. Engaging children in the family business can provide invaluable experience for the younger generation while potentially creating tax efficiencies for the family unit. However, this practice necessitates careful consideration of the legal requirements, tax implications, and regulatory frameworks to ensure compliance with UK employment and tax legislation.
Legal Framework for Child Employment in UK
Before exploring the tax benefits, understanding the legal constraints is essential. In the United Kingdom, the employment of children is governed by strict regulations designed to protect their welfare and education. The Children and Young Persons Act establishes that children under 13 years cannot be employed except in limited circumstances such as entertainment, modeling, or certain agricultural activities, which require specific permits. Children aged 13-16 may work part-time, but only outside school hours and subject to local authority restrictions. These restrictions typically include limitations on working hours: during term time, children can generally work up to 12 hours weekly, while during school holidays, this increases to 25 hours for 13-14 year olds and 35 hours for 15-16 year olds. Family businesses must register with local authorities when employing children and obtain the necessary permits, even when the employment involves their own children.
Minimum Age Requirements and Working Conditions
The employment relationship in family businesses must adhere to statutory minimum age requirements regardless of the familial connection. Children aged 16-17, while legally permitted to work full-time, remain subject to special protections under the Working Time Regulations 1998, including restricted night work and mandated rest periods. When structuring employment for minors within a family business, it’s imperative to ensure that the working environment complies with health and safety regulations applicable to young workers. The Management of Health and Safety at Work Regulations stipulate that employers must conduct specific risk assessments for workers under 18, accounting for their physical development, inexperience, and potential lack of awareness of workplace risks. Even when employing one’s own children, family businesses must maintain formal employment records, including written particulars of employment terms for those over 16 working more than one month.
Tax Advantages of Employing Family Members
From a tax perspective, employing children in a family business can create legitimate opportunities for income splitting and tax efficiency. For sole traders and partnerships, paying a reasonable salary to a child for genuine work performed allows the business to claim tax relief on these wages as a business expense, effectively transferring income from potentially higher tax rates to the child’s personal allowance. As of the 2023/24 tax year, the personal allowance stands at £12,570, meaning a child can earn up to this amount without incurring income tax liability. Additionally, National Insurance Contributions (NICs) thresholds provide further advantages: no NICs are due on earnings below the Lower Earnings Limit (£6,240 annually for 2023/24), with reduced rates applying between this and the Primary Threshold. These arrangements must be structured properly to withstand HMRC scrutiny, with genuine work being performed and remuneration set at commercial rates appropriate for the child’s age, skills, and responsibilities.
Documentation and Record-Keeping Requirements
Proper documentation is crucial when employing children in a family business to satisfy both employment regulations and tax authorities. Businesses should maintain comprehensive records including: formal employment contracts specifying working hours, duties, and remuneration; time sheets documenting actual hours worked; payroll records demonstrating regular payment at appropriate rates; job descriptions outlining specific responsibilities; and performance reviews evidencing the value provided to the business. For children under 16, additional documentation such as work permits from local education authorities must be obtained and retained. HMRC increasingly scrutinizes family employment arrangements, so maintaining robust documentation is essential to demonstrate the commercial reality of the employment relationship. This documentation should be preserved for at least six years in accordance with both employment law requirements and HMRC record-keeping obligations for tax purposes, as outlined in the UK Companies Registration and Formation guidelines.
National Insurance Considerations
National Insurance implications represent an important consideration when employing children in family businesses. For children under 16, no National Insurance contributions are required from either the employer or employee regardless of earnings level. For those aged 16 and over, standard NIC rules apply, with both employer and employee contributions potentially due depending on earnings. For the 2023/24 tax year, employers must pay NICs at 13.8% on earnings above the Secondary Threshold (£9,100 annually), while employees begin paying NICs at 12% once earnings exceed the Primary Threshold (£12,570 annually). Family businesses structured as limited companies should be aware that employing family members below market rates may trigger benefit-in-kind implications if other shareholders are disadvantaged. Conversely, partnerships and sole traders face fewer restrictions but must still ensure remuneration reflects the actual contribution to the business to satisfy HMRC requirements regarding the wholly and exclusively for business purposes test for expense deductibility.
Structuring Remuneration Packages
Strategic planning of remuneration packages for children employed in family businesses can optimize tax efficiency while ensuring regulatory compliance. While basic salary payments represent the most straightforward approach, family businesses might consider implementing additional remuneration structures such as pension contributions. Under current legislation, employers can contribute up to £40,000 annually to an employee’s pension (subject to the Annual Allowance rules) with full tax relief, regardless of the employee’s age. These contributions do not trigger National Insurance liabilities and provide long-term tax-advantaged savings for the child. For older children (typically 18+), share option schemes or partnership profit shares might be considered, although these arrangements require careful structuring to comply with tax legislation and avoid HMRC challenges. In all cases, remuneration should correspond to market rates for comparable roles and responsibilities to satisfy the “wholly and exclusively” test for business expense deductibility, while documentation should clearly demonstrate the commercial justification for the remuneration structure.
HMRC Scrutiny and Anti-Avoidance Measures
HMRC maintains vigilant oversight of family business employment arrangements, particularly those involving children, to prevent artificial tax avoidance schemes. Tax inspectors specifically look for arrangements that lack commercial substance, such as excessive remuneration for minimal duties or payment for work not actually performed. The settlements legislation (formerly Section 660A, now incorporated in the Income Tax (Trading and Other Income) Act 2005) represents a particular concern, designed to prevent income diversion within families. This legislation may be applied where income is diverted to a lower-taxed family member but the higher-taxed individual retains control or benefit from those funds. To withstand HMRC scrutiny, family businesses should ensure all employment arrangements have genuine commercial purpose, with remuneration commensurate with the value added to the business. Regular reviews of employment terms, contemporaneous documentation of work performed, and alignment with industry standards for similar roles can help establish the commercial validity of family employment arrangements and mitigate the risk of HMRC challenges.
Family Business Structure Considerations
The legal structure of a family business significantly impacts the tax treatment and regulatory requirements when employing children. Sole traders and partnerships offer greater flexibility in employing family members, with fewer formal requirements than limited companies. However, limited companies provide the advantage of clearer separation between business and personal finances, which can be beneficial for demonstrating the commercial nature of employment arrangements. Limited companies must be particularly careful to avoid breaching directors’ duties under the Companies Act 2006, especially regarding the duty to promote the success of the company for the benefit of all shareholders. If a company has non-family shareholders, remuneration arrangements for family members must be demonstrably in the company’s interest. When restructuring an existing business or establishing a new enterprise with the intention of employing family members, seeking professional advice on the optimal business structure can provide long-term tax efficiency while ensuring compliance with both employment and tax legislation.
Employing Children Under 13
Employing children under 13 requires special consideration due to the significant legal restrictions in place. While the general prohibition on employment under 13 does apply to family businesses, certain exceptions exist, particularly in agricultural settings and family-owned retail environments. These exceptions typically require specific permits from local education authorities and are subject to strict limitations on working hours and conditions. Even when legally permissible, remuneration for children under 13 faces heightened scrutiny from tax authorities. To justify business expense treatment, parents must demonstrate that the work performed is age-appropriate, necessary for the business, and compensated at reasonable rates. Activities might include simple administrative tasks, basic customer service, or light stockroom duties, provided they comply with health and safety requirements for young workers. Documentation becomes even more critical in these cases, with detailed records of specific duties performed, hours worked, and supervision arrangements. Family businesses considering employing children under 13 should consult with both legal advisors and tax specialists to ensure full compliance with the complex regulatory framework governing such arrangements.
Employing Older Children (16-18)
Employing older children aged 16-18 in family businesses presents fewer legal restrictions but still requires careful consideration of both employment regulations and tax implications. At this age, children can legally work full-time, though those under 18 remain subject to working time restrictions, including maximum 8-hour days and 40-hour weeks, with restricted night work and mandatory rest periods. From a tax perspective, employing children in this age group can be particularly advantageous: they benefit from the full personal allowance (£12,570 for 2023/24), potentially allowing this amount of income to be transferred from higher-taxed parents to the non-taxable child. For those in education, employment in the family business can qualify for certain apprenticeship programs, potentially providing additional funding and training opportunities that benefit both the business and the young person. Family businesses might also consider introducing older children to management responsibilities, preparing them for potential succession while justifying higher remuneration based on increased responsibilities. For families with business interests across multiple jurisdictions, opportunities may exist for children to gain international experience while maximizing tax efficiencies across different tax regimes.
Education Considerations and Compliance
Balancing educational requirements with employment in the family business represents a critical consideration when employing school-age children. UK legislation prioritizes education, with strict limitations on term-time working hours to prevent interference with schooling. Local education authorities have enforcement powers regarding child employment and may intervene if employment appears to impact educational performance. During term time, children aged 13-16 can typically work a maximum of 12 hours weekly, with restrictions on early morning, evening, and weekend work. School holiday periods allow for increased working hours, but mandatory rest periods must be observed. For children pursuing further education beyond 16, employment arrangements should accommodate examination periods and study requirements. Some educational institutions offer specialized programs combining academic study with work experience, potentially providing formal recognition of skills developed within the family business. Family businesses should maintain open communication with children’s educational institutions, ensuring employment supports rather than hinders educational development. Compliance with education-related employment restrictions is non-negotiable, as violations can result in significant penalties for the business regardless of the family relationship.
Case Study: Successful Implementation
Consider the practical application of these principles in the case of the Thompson family, who operate a successful retail and e-commerce business structured as a limited company. The Thompsons implemented a graduated approach to employing their children: their 14-year-old daughter works Saturday mornings during term time and three days weekly during holidays, handling social media content creation and basic customer service. Her remuneration reflects market rates for similar roles, with careful documentation of hours worked and duties performed. Their 17-year-old son works part-time in website management and digital marketing, with remuneration including both salary and pension contributions. The business maintains comprehensive documentation, including formal employment contracts, job descriptions, performance reviews, and payroll records. This structured approach has allowed the Thompson family to achieve tax efficiencies while providing valuable business experience to their children. The arrangement withstood HMRC review due to the clear commercial basis for employment, appropriate remuneration levels, and thorough documentation. This case demonstrates how careful planning and implementation can create legitimate tax advantages through family employment while ensuring regulatory compliance and business development, illustrating best practices that could be applied to businesses registering a company in the UK.
International Considerations for Global Family Businesses
For family businesses operating across multiple jurisdictions, employing children presents additional complexities but also potential opportunities. International taxation principles such as tax residency, permanent establishment rules, and double taxation agreements significantly impact the tax treatment of cross-border employment within family businesses. Families with business interests in multiple countries may benefit from strategic employment of children in jurisdictions with favorable tax treatments, provided the employment has genuine commercial substance and complies with local regulations. For UK-based families with international business interests, considerations include the potential application of the UK’s statutory residence test, which determines tax liability based on presence in the UK and connecting factors. Non-UK resident children employed in overseas branches of family businesses may avoid UK taxation on those earnings, subject to the complex rules regarding domicile and residency. Families considering international employment arrangements should seek specialized advice from international tax consultants familiar with both UK and relevant foreign tax regimes to ensure compliance with reporting requirements such as the Foreign Income and Assets Statement and to optimize the tax efficiency of global employment structures.
Succession Planning Integration
Employing children in the family business often forms part of broader succession planning strategies, with tax implications extending beyond immediate income considerations. Introducing children to the business through formal employment provides practical experience and assesses their aptitude for future leadership roles. From a tax perspective, gradual transfer of ownership through properly structured employment and remuneration can mitigate inheritance tax liabilities. Business Property Relief potentially offers up to 100% relief from inheritance tax on qualifying business assets transferred during lifetime or upon death, subject to specific conditions being met. Employment arrangements can be structured to facilitate gradual ownership transfer through mechanisms such as Enterprise Management Incentive (EMI) schemes, which provide tax-advantaged share options for employees, including family members, subject to qualifying conditions. Family Investment Companies represent another potential structure, allowing parents to retain control while transferring economic value to children through employment and dividend arrangements. Integrating employment strategies with longer-term succession planning requires comprehensive consideration of business continuity, family dynamics, and tax efficiency, often benefiting from specialized advice on succession in family businesses from advisors experienced in both tax and family business governance.
Common Pitfalls and How to Avoid Them
Several common mistakes can undermine the tax efficiency and legal compliance of employing children in family businesses. One frequent error involves inadequate documentation – failing to formalize the employment relationship with proper contracts, job descriptions, and performance records. This deficiency leaves businesses vulnerable to HMRC challenges regarding the commercial reality of the arrangement. Another significant pitfall is inappropriate remuneration – paying children amounts disproportionate to their contributions or skills, which may be reclassified as distributions rather than legitimate business expenses. Family businesses sometimes neglect compliance with broader employment legislation, incorrectly assuming that family relationships exempt them from requirements regarding working conditions, minimum wage provisions, or health and safety regulations. To avoid these issues, family businesses should: implement formal employment procedures for all family members; ensure remuneration reflects market rates for comparable roles; maintain comprehensive documentation of work performed; comply with all relevant employment legislation regardless of family relationships; and regularly review arrangements to ensure ongoing compliance as children develop and their contributions to the business evolve. These practices help establish the commercial legitimacy of family employment arrangements while maximizing available tax efficiencies within the legal framework.
Future Tax Planning with Growing Children
As children mature and their involvement in the family business evolves, tax planning strategies should adapt accordingly. For young adults pursuing higher education, continued employment in the family business can provide income supporting their studies while potentially qualifying for tax advantages such as the reduced National Insurance contributions available to students. As children develop specialized skills through education or external work experience, their return to the family business can justify increased remuneration commensurate with their enhanced value to the enterprise. For adult children taking on management responsibilities, more sophisticated remuneration structures might be appropriate, including performance-based bonuses, share option schemes, or partnership profit shares, each with distinct tax implications requiring careful planning. Family businesses might consider establishing separate divisions or subsidiaries managed by adult children, potentially creating additional tax planning opportunities while facilitating business expansion. The transition from employing children to integrating them as business partners or shareholders requires comprehensive tax planning, particularly regarding capital gains tax and inheritance tax implications of ownership transfers. Family businesses anticipating this evolution should seek specialized advice on tax planning for high income earners to optimize the tax efficiency of transitional arrangements while ensuring compliance with increasingly complex anti-avoidance legislation.
Expert Guidance for Your Family Business
Navigating the complexities of employing children in family businesses demands specialized knowledge across multiple disciplines. If you’re seeking to implement tax-efficient family employment strategies while ensuring full compliance with UK legislation, professional guidance is essential. Family businesses benefit from integrated advice covering employment law, tax legislation, business structuring, and succession planning to develop sustainable approaches that withstand regulatory scrutiny.
If you’re seeking expert guidance on structuring employment arrangements within your family business, we invite you to book a personalized consultation with our specialized team at LTD24. As an international tax consulting boutique, we offer advanced expertise in corporate law, tax risk management, asset protection, and international audits. We provide tailored solutions for entrepreneurs, professionals, and corporate groups operating globally.
Schedule a session with one of our experts now for just $199 USD/hour and receive concrete answers to your corporate and tax questions relating to family employment structures: https://ltd24.co.uk/consulting
M. Ángeles is a Secretary at Ltd24, where she manages administrative operations and oversees the incorporation of companies in various countries. She holds a degree in Business Administration and Management from Spain and provides multilingual support to her clients, ensuring efficiency and accuracy in all operational processes. Thanks to her expertise in international corporate documentation, she is also a specialist in regulatory compliance and anti-money laundering, advising professionals and businesses in the UK and European markets. In her free time, M. Ángeles enjoys learning languages.
Comments are closed.