Employing a child through a limited company

[Havingalaugh21]

Can anyone tell me how this works and is it legal. My DH wants to pay our 19 year old DS through his limited company to fund through uni but DS will not have an actual job/be working for him. Doesn't sound right to me but he assures me this is OK...

He isn't a child if he is 19. It is presumably a tax dodge to give the DS some cash to top up student loans and decrease profit so that the parent pays themselves less or doesn't pay tax on that amount they are "paying" the son.

Sorry - not a child, I think family member would have been a better description. Does tax dodge = illegal? I'm not comfortable with this but it's not my company

It's very clearly a tax dodge. Immoral

More valuable( and ethical) if your ds actually did some work and got experience- check with your dh’s accountant.

Tax evasion is a crime, yes.

If your DS is a shareholder in the Ltd company then he will be able to be paid in dividends. We do similar with DH company in which his DM is a shareholder and we pay her a dividend each month to help her but she doesn't have any involvement in the company itself.

If DS is paid dividends then all other shareholders should be paid them.

This isn't new or original and your instincts are correct.

You can employ family members as employees. However, they have to actually do work.

If your husband is saying the money he is paying to your son is wages, then HMRC will expect accurate records to be kept of what work your son is doing.

In fact, a similar case was taken to tribunal and the judge found that the payments made were nothing more than a father supporting a son at university. He had to repay all outstanding tax etc.

So, unless your son is undertaking work for the business and accurate records are kept to prove this, then I wouldn't do it.

HMRC wouldn't be concerned about your son's earnings and his taxes, but they might be interested in whether the salary is an appropriate tax deduction in the company's business.

For any cost to achieve a tax deduction in a company's accounts it has to be "wholly and exclusively" for the purposes of the business.

Giving your son money from the company when he's not working for it might not meet that requirement.

HOWEVER, if the company didn't pay your son, it could pay your DH that amount instead and just hand the net pay over to your son. If he was paying himself, then HMRC wouldn't have an issue with it.

Overall, either way, HMRC aren't necessarily out of pocket (at least not significantly), so I think realistically they wouldn't be too concerned about it.

When DS is home from Uni though I think this is a perfect opportunity for him to do some work for his Dad in exchange for his salary!

Just casually sharing details of your tax evasion activity on an internet chat forum. Amazing stuff 🧠

@MiddleParking that isn’t tax evasion though, shareholders don’t need to do any work for a company. Tax avoidance and tax evasion aren’t the same thing. You can have who ever you want as a shareholder.

@MiddleParking You have no idea what you're talking about. Paying a dividend to a shareholder who does no "work" in the company is completely normal and completely legal.
If the pp was talking about paying their mum a salary as an employee for doing nothing, that's completely different

What october77 is doing is fine.

Shareholder is completely different to an employee.

For example, you can buy shares in Facebook (therefore you're a shareholder) and recieve Dividends. But this doesn't mean you're an employee of Facebook.

What october77 is suggesting is completely fine. The only concern is that you'll have too 100% trust your child.

@MiddleParking I have shares in Santander, they pay out to me every so often. I don't work for them! It's a common practice for dividends to be paid out to shareholders on company profits, we all do tax returns and these are accounted for in those, no evasion whatsoever.

I have a feeling the OPs husband is planning to pay his son a wage.

Whilst tax and NI need to be paid the son benefits from his personal allowance of £12,570 pa.

The advantages are:

• son meets the minimum £ for NI = qualifying year for state pension & benefits
• son contributes to works pension + gets employer contributions
• son may be entitled to statutory in work benefits e.g. SSP, SPP, ShPP etc.
• son has income for university
• son maximises personal allowance
• DH reduces his take home pay/drawings by the gross amount paid to son, so pays less tax. Particularly beneficial if he is in the 40% or 45% tax band.

The son could be paid £20 per hour for 12 hours per week (on average) = £12,480 pa. If they really think about it son could work full time for a few weeks during holidays and take their statutory 5.6 weeks holiday and receive holiday pay at full time rate reducing the number of term time hours he needs to work.

For appearances, give the son some easy work to do e.g. filing. He can study along side work -after all a lot of WFH posters on here appear to do chores etc during working time.

A lot of self employed do this by putting wife on the books and giving them little jobs to do. Note: Some wives fully contribute to the business doing the admin etc.

It is up to a business what hourly rate they pay. As long as everything goes through the books, PAYE etc. it’s legal tax avoidance not evasion.

If the son is appointed as a director he can be paid a directors salary in respect of that. He doesn't have to work for the salary, the remuneration is for BEING a director.

Your instinct is correct, OP. Paying your ds a salary in return for no work is not legit.

Are you saying there's a specific type of salary for directors who dont do anything?

Is that really a thing?

I pay my son (he's 14) in lieu of pocket money but he does actually work for me.

I get him to make social media graphics, knock up the odd spreadsheet and research some background info for me.

I'm saying that a director can be remunerated for HOLDING THE OFFICE OF A DIRECTOR, rather than for any specific work they do.
In family situations like this, the directors generally wouldn't have a contact of employment (so no national minimum wage issues either).

It is very common for a non-working spouse to be a director (and probably a shareholder and take dividends, but that's a separate matter) and to receive a salary.
I've seen this extended to university aged children in lots of cases.

"october77
If your DS is a shareholder in the Ltd company then he will be able to be paid in dividends. We do similar with DH company in which his DM is a shareholder and we pay her a dividend each month to help her but she doesn't have any involvement in the company itself.

If DS is paid dividends then all other shareholders should be paid them.

Just casually sharing details of your tax evasion activity on an internet chat forum. Amazing stuff 🧠"

The post you quoted didn't have any tax evasion issues. Dividends are paid to shareholders. You don't need to work for a company to be a shareholder.

Not really, in the UK (not sure about other territories/countries)

If you hold the title as a "Director" you are expected to contribute to the running of the business.
You dont necessarily have to do day to day management, but it is expected they contribute to the business, such as making decisions, attending board meeting etc. Even for small businesses.

There is not really such thing as a sleeping/shadow or non exec director. Or a director in name only. They can call themselves that if they want, but the responsibilities are the same as any other director and they are expected to perform some form of duties for the business.
There are statutory duties listed in the Corporate Tax Act that detail the roles and responsibilities of directors.

You are correct there is no NMW issues, but only if the family member lives in the same residential address.

I disagree with the Contract of Employment. A director is essentially an employee of the company and should adhere to all requirements expected of any employee.
The director, if they are also the shareholder, have flexibility of how they are remunerated, for example PAYE or Dividends or both. But this should be properly documented.