21/04/2026
MONTHLY FOCUS: USING YOUR COMPANY TO DIVERT INCOME TO FAMILY MEMBERS
Read the full article:- https://dunhamsaccountants.co.uk/2026/monthly-focus-using-your-company-to-divert-income-to-family-members/
Operating a business through a limited company is less tax-efficient than it used to be. However, it can still be a very useful way of diverting income to other family members. In this Monthly Focus, we look at the methods, and associated considerations, involved in doing this.
MONTHLY FOCUS: USING YOUR COMPANY TO DIVERT INCOME TO FAMILY MEMBERS
EMPLOYING YOUR FAMILY
As a general rule, you can save income tax if income can be diverted from you to other members of your family to make use of their annual personal allowances and benefit from their lower marginal rates of tax.
Warning! If you employ family members, their salaries will tend to come under scrutiny during the course of an enquiry by HMRC into your company’s accounts. HMRC will be looking to see whether the salaries exceed a commercial rate for the work performed. Where the amount paid clearly exceeds the commercial rate, HMRC will seek to disallow the excess on the grounds that it has not been incurred wholly and exclusively for the purposes of the company’s trade. An identical rule applies to unincorporated businesses.
The “wholly and exclusively” point was considered in the First-tier Tribunal (FTT) case of McAdam v HMRC 2017 where a plumber claimed a deduction for £90 per week to his wife for writing up his books, taking phone calls, processing orders, etc. HMRC accepted that the taxpayer’s wife had done some work, but calculated that an appropriate wage would be £1,344 per annum (about £26 per week), at an hourly rate of £8.
The FTT agreed with HMRC and refused the deduction. It said the payment was excessive compared to the going rate for the type of work, plus the plumber’s business records were poor and there was nothing really to show how much work his spouse did or that she was employed at all.
To avoid this trap, make it clear what the family member is doing. To help, use a Family Member’s Job Description to set out the duties they will carry out.
OTHER ARTICLE QUESTIONS COVERED.
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When is it beneficial to employ your spouse?
What’s the optimal salary to pay your spouse?
Is it more tax efficient for them to be an employee or self-employed?
Your spouse is not a shareholder in the company
Can your company pay your children a salary?
Why is it more tax efficient?
How many hours a week can your children work?
What’s the optimal amount to pay your child?
Paying dividends to family members
How much could your spouse receive in dividends?
How does your spouse become entitled to dividends?
Using alphabet shares
If you would like any assistance with any of these points.
Please Call Us on 0161 872 8671
