Numerico Chartered Certified Accountants

You've heard this many times, "I'll get the company to pay so it can claim a tax deduction". However simply using the company’s bank account to pay a non-business expense won't make it tax deductible. Companies can't claim tax deductions for expenses unless these are incurred "wholly and exclusively for the purpose of the trade".

So can you pay a family member? Let’s assume you would like to employ your son or daughter just to give them work experience they can put on their CV or to give them some cash in their pocket. Clearly there's an advantage for you and them, but does this break the wholly and exclusively rule?

To answer the question above you need to look at what your company gets out of the deal.  Your company will be entitled to a tax deduction for your son's or daughter’s wages, as long as the amount of salary is at an appropriate level for the type of work done.  HMRC’s internal guidance manual (BIM47105) states: "So where there is "equal pay for equal value" the amount paid is fully allowable, notwithstanding any connection between payer and recipient".

So, yes, you can create a role for your son or daughter as long it serves a function for your company and get a tax deduction for the cost of paying your child.

In December the Chancellor confirmed changes to the personal tax and NI limits for 2013/14.

The Chancellor confirmed a generous increase in personal tax-free allowances, but for higher rate taxpayers some of this is snatched back by reducing the point at which the higher rate tax kicks in.

So at what level should you set your salary and dividends for maximum tax efficiency?

The most tax efficient mix for director/shareholders of salary and dividends for 2013/14 is one where neither you nor your company pays NI, and you have no further tax to pay on the dividends you receive. Working on the assumption that you have no other income, this can be achieved with:

• an annual salary of £7,696; plus
• dividends of £30,379

This is a net annual income of £38,075.  Because the taxable amount doesn’t exceed the basic rate tax band no further tax is payable on the dividends received.