Employing your partner or your kids: the rules that actually apply

Family labour is the hidden subsidy underneath a very large share of UK small business. The partner who does the bookkeeping on a Sunday, the teenager who works Saturdays in the shop, the parent who answers the phone. Most of it happens informally for years, and then somebody suggests putting it through the books properly, which is usually the right instinct and occasionally an expensive one if you do it without knowing the rules.

The short version is that employment law does not have a family discount. A family member who works for your business is a worker or an employee like anybody else, with almost all the same rights, and the exceptions are narrower than the pub version suggests.

The minimum wage exemption is narrower than people think

There is a genuine minimum wage exemption for family members, and it is the single most misquoted rule in this area. It covers a family member who lives in the employer's family home and takes part in running the family business or in the household's chores. That is it.

The trap is the words 'the employer'. HMRC's own National Minimum Wage manual is blunt about it: a limited company is a legal entity in its own right, it cannot have a family, be a member of a family, or own a family home. So if your business is a limited company, and most are, the exemption simply does not exist for you. Your spouse working in your company must be paid at least the minimum wage for the hours worked, which from April 2026 is £12.71 an hour for workers aged 21 and over.

Sole traders and partnerships can rely on the exemption, but only where the family member genuinely lives in the family home. A grown-up child who has moved out and comes back to help on Saturdays is not covered.

Employment law does not have a family discount. Everything you would have to do for a stranger, you have to do for your brother.

That extends beyond pay. A family employee needs a written statement of employment particulars from day one, accrues holiday, is covered by working time rules, and after the qualifying period can bring an unfair dismissal claim. Right to work checks apply to them too. Do you need a written employment contract for your first hire? applies without modification when the first hire shares your surname.

When you actually have to run payroll

You must register as an employer and operate PAYE once you have an employee who earns at or above the lower earnings limit, which is £129 a week or £559 a month in 2026/27, or who has another job or a pension. Below that, with no other employment, the strict requirement falls away, though in practice most businesses run payroll anyway because the records are cleaner.

There is a positive reason to pay at least the lower earnings limit rather than just under it. Earnings at or above that level create a qualifying year for the state pension without any National Insurance actually being payable, which is genuinely valuable for a spouse with a patchy contribution record.

Employer National Insurance starts at the secondary threshold of £5,000 a year and is charged at 15% above it. The Employment Allowance, worth up to £10,500 in 2026/27, wipes out a lot of that, but a company whose only employee is a sole director cannot claim it. Adding a genuinely employed family member above the secondary threshold makes the company eligible.

Automatic enrolment applies as well. The earnings trigger is £10,000 a year and the qualifying earnings band runs from £6,240 to £50,270. When you hire your first employee, the workplace pension duty starts whether or not the employee is related to you.

The amount has to be defensible

For the wage to be deductible against your profits it must be incurred wholly and exclusively for the purposes of the trade. HMRC's standard challenge is not that you employed a family member; it is that the pay is out of proportion to the work. A spouse paid £12,000 for two hours of filing a week invites exactly that question.

The defence is boringly practical. Write down what the job is. Keep a simple record of hours or a note of the duties. Pay a rate you would pay a stranger for the same work. Pay it on the same date every month, by bank transfer, into an account in their own name. Paying a family member's wages into your own account is the single fastest way to unravel the whole arrangement, because it looks like what it is: a book entry rather than a job.

A worked example

Illustrative figures, but a very common shape. A one-person limited company adds the owner's spouse, who genuinely does around six hours a week of bookkeeping, ordering and customer email.

Pay it at £4,680 a year and you have avoided employer National Insurance, because it is under the £5,000 secondary threshold, but £90 a week is below the lower earnings limit so it does nothing for the state pension record, and the company still cannot claim the Employment Allowance.

Pay £6,708 instead, which is £129 a week, and three things change. It is above the lower earnings limit, so it is a qualifying year for the state pension at no National Insurance cost to the employee. It is above the secondary threshold, so the company has an employer National Insurance liability of 15% on £1,708, about £256, which makes the company eligible for the Employment Allowance that then covers it. And the whole £6,708 is deductible, saving £1,274 of corporation tax at 19%, while sitting comfortably inside the spouse's £12,570 personal allowance so there is no income tax on it either.

The difference between those two numbers is about £2,000 of gross pay and a materially better outcome. The condition attached to all of it is that the six hours a week are real.

Dividends to a spouse are a different question

Paying a spouse through shares rather than wages is a separate mechanism with separate rules, and it does not require them to work in the business at all. The relevant law is the settlements legislation, tested at the House of Lords in Jones v Garnett in 2007, the case everyone calls Arctic Systems. The Lords accepted that transferring shares to a spouse created a settlement, but held it was saved by the exemption for outright gifts between spouses and civil partners.

The practical lesson from that case is about what you give. The exemption applies to an outright gift of ordinary shares carrying full rights, voting and capital as well as income. Shares engineered to carry a right to dividends and nothing else, or elaborate dividend waivers where one shareholder repeatedly gives up their entitlement so another can take more, are where HMRC still looks. Dividend rates for 2026/27 are 10.75% at the basic rate, 35.75% at the higher rate and 39.35% at the additional rate, after a £500 dividend allowance. Salary and dividends: how directors actually pay themselves covers the mechanics.

Employing your own children

Children can generally work part-time from the age of 14, and some local council areas allow 13 for specified light work. Below the school leaving age, an employment permit issued by the local council's education department is normally required, and each council sets its own byelaws covering the hours a child may work on a school day, at weekends and in the holidays, along with the jobs that are barred outright. A child cannot work full time until they have reached school leaving age.

The tax position is friendlier than the employment law position. Under 16s pay no National Insurance, and a child has the same £12,570 personal allowance as anyone else, so modest earnings from genuine Saturday work are usually tax free in their hands and deductible in yours. The same defensibility test applies: real work, real hours, a real rate, paid into their own account.

What to do this week

Make a list of everyone connected to you who does anything for the business, including the ones you have never paid. For each, decide whether it is genuinely work. If it is, put it on the payroll properly with a job description, an hourly rate and a payslip, and check whether you are above or below the £129 a week lower earnings limit and the £5,000 secondary threshold, because those two numbers change the answer more than anything else.

If it is not really work, do not invent a wage for it. That is the version that fails, and it fails in the same enquiry that then looks at everything else. Minimum wage traps for small employers is worth reading alongside this if any of your family employees are paid near the floor.

Common questions

Do I have to pay my wife or husband the minimum wage?

If your business is a limited company, yes. There is a family member exemption from the National Minimum Wage, but it applies only where the employer is an individual, and HMRC's guidance states plainly that a company cannot have a family or a family home. A sole trader or partner can rely on the exemption for a family member who lives in the family home and helps run the family business, but a company cannot. From April 2026 the rate for workers aged 21 and over is £12.71 an hour. Assume the minimum wage applies unless you are a sole trader and your family member genuinely lives with you.

How much can I pay a family member before I have to run payroll?

You must register as an employer and operate PAYE once someone earns at or above the lower earnings limit, which is £129 a week or £559 a month in 2026/27, or if they have another job or a pension. Below that, with no other employment, PAYE registration is not strictly required. In practice, paying at least the lower earnings limit is often the better plan even where you could pay less, because earnings at that level create a qualifying year for the state pension without any National Insurance actually falling due. Employer National Insurance itself only starts above the £5,000 secondary threshold.

Can I employ my 14-year-old in the business?

Usually yes, with conditions. Children can generally work part-time from 14, and some councils permit 13 for specified light work. You will normally need an employment permit from the local council's education department, and that council's byelaws set the maximum hours on school days, weekends and holidays, plus the jobs children cannot do at all. Full-time work is not permitted until school leaving age. On tax, under 16s pay no National Insurance and a child has the same £12,570 personal allowance as an adult, so genuine part-time earnings are usually tax free for them and deductible for you.

Is it safer to pay a spouse in dividends than in wages?

They answer different questions. Wages require actual work at a defensible rate, and are deductible against your profits. Dividends require share ownership and no work at all, but are paid from post-tax profit with no corporation tax deduction. Dividends to a spouse are governed by the settlements legislation, which the House of Lords addressed in Jones v Garnett in 2007, holding that the exemption for outright gifts between spouses applied. The safety lies in the structure: gift ordinary shares carrying full voting and capital rights, not income-only shares, and avoid repeated dividend waivers. Many owner-managed couples sensibly use both routes.