You can deduct wages paid to a spouse, civil partner, child or other relative, but only if the work is real and the pay reflects what the job is worth rather than the family tie. HMRC applies the wholly and exclusively test in section 34 ITTOIA 2005 (section 54 CTA 2009 for companies) and expects evidence that the work was done and the money actually reached the family member.

Can I pay my spouse or children and claim it as a business expense?

Yes, provided the payment passes the ordinary wholly and exclusively rule. HMRC’s Business Income Manual at BIM47105 says that the fact an employee is a close relative or friend of the proprietor does not mean the wages are automatically disallowed. If there is no non trade purpose and the amount is not set by the relationship, the payment is fully allowable, and where there is equal pay for equal value the connection between payer and recipient is irrelevant.

The reverse also applies. If part of the reason for paying is to move income to a relative, or the amount is driven by the relationship, the payment fails the test. Where only a definite part or proportion is not paid for the trade, HMRC is told to disallow only that part, so an inflated wage is usually cut back to a commercial figure rather than refused outright.

This page deals with real employment of relatives. Money you take for yourself is not a wage at all; see drawings for sole traders.

How does HMRC decide whether the pay is too high?

BIM47105 treats pay that exceeds a reasonable reward for the value of the work, judged on a commercial basis, as evidence of a non trade purpose. A relative paid significantly more than third parties doing the same work is a warning sign. HMRC looks at the whole package, meaning salary, wages, benefits and pension contributions together, not just the headline wage.

BIM47106 adds that where a relative’s package is in line with unconnected employees, HMRC should accept it. Where no direct comparison exists, officers are told to pick comparators with similar qualifications, experience and job description, and to look at how pay has changed over time and why.

Two further risks sit alongside the deduction question. Where pay that cannot be justified commercially goes to the husband, wife or minor child of a controlling shareholder or director, BIM47106 notes that the settlements legislation in Part 5 Chapter 5 ITTOIA 2005 may tax it on the provider instead (see settlements legislation and spouses and the parental settlements rule). And in a company, if a relative is simply a conduit, the payment may be taxed as the director’s own earnings under section 62 ITEPA 2003.

What did the courts decide in the leading family wage cases?

Dollar v Lyon: children on the family farm

In Dollar v Lyon [1981] 54 TC 459, summarised at BIM37737, a farming couple paid their four children, aged 14, 11, 9 and 7, £2 a week each and bought each of them £250 of National Savings Certificates, then claimed the payments as wages. The Commissioners found the payments were pocket money and disallowed them, apart from a cash payment of £104 to the eldest child, and Vinelott J upheld that decision. He held that illegality alone would not block a genuine wage, but that payments made out of natural parental love and affection are not deductible. HMRC highlights that each child received the same amount, that it was commensurate with pocket money, and that the idea of a child of eight entering a contract of employment was strange and unconvincing.

Moschi v Kelly: wages that never left the business

In Moschi v Kelly [1952] 33 TC 442, summarised at BIM37735, wages for the trader’s wife were charged in the accounts but credited to his own drawing account. The deduction failed because there was no reliable evidence beyond discredited accounts that the wages were genuine. Today the trader would also face section 36 ITTOIA 2005 (section 1288 CTA 2009 for companies), which denies a deduction for remuneration not paid within nine months of the end of the period of account. BIM47130 confirms that the nine month rule does not apply to businesses using the cash basis, which only deduct what is actually paid anyway.

Does the minimum wage apply to family members?

Usually, yes. Workers of at least school leaving age are entitled to the National Minimum Wage, and the rates from April 2026 are £12.71 an hour for those aged 21 and over, £10.85 for 18 to 20 year olds and £8 for under 18s and apprentices. The minimum wage page covers how pay is tested.

There are two family exemptions in the National Minimum Wage Regulations 2015. Regulation 58 says work in the employer’s family business does not count as work where the worker is a member of the employer’s family, lives in the employer’s family home and participates in running the family business. Regulation 57 gives a similar exemption for work in the family household. A spouse who lives with you and helps run the business can therefore fall outside the minimum wage, but an adult child who has moved out does not. Not paying the minimum wage where it applies is a criminal offence.

The exemption and the tax test are separate. Paying a relative less than the market rate does not threaten the deduction; it is overpayment that HMRC challenges.

What extra rules apply to children?

GOV.UK states that children can work part time from age 14, or 13 in some council areas, and can only work full time once they reach the minimum school leaving age. School aged children are not entitled to the National Minimum Wage. Children under 16 do not pay National Insurance, so they only need to be on the payroll if their total income is over their Personal Allowance. Local councils can impose further restrictions on hours and types of work, so check before treating a child as an employee.

Do I need to run payroll for a family member?

A relative who is an employee is treated like any other. You normally need to register with HMRC as an employer when you start employing staff, and you must register before the first payday. For 2026 to 2027 the Class 1 thresholds are a lower earnings limit of £129 a week, a primary threshold of £242 a week (£12,570 a year) and a secondary threshold of £96 a week (£5,000 a year), with employer contributions at 15% above the secondary threshold.

Running payroll also helps the deduction. BIM47130 says that where PAYE has been operated, HMRC should accept this as sufficient evidence that the remuneration has been paid. Payroll records must be kept for 3 years from the end of the tax year they relate to, and minimum wage records for at least 6 years.

A worked example

Illustration only. Sam is a self employed electrician. His wife Priya answers calls, books jobs and keeps the books for 8 hours a week, and local agencies charge more than £15 an hour for similar admin support. Sam pays her £15 an hour, so £120 a week or £6,240 a year, into her own bank account through payroll.

  • Her pay is below the primary threshold, so no employee contributions are due.
  • Employer contributions are due on the £24 a week above the £96 secondary threshold: £24 x 15% = £3.60 a week, or £187.20 a year.
  • Sam deducts £6,240 plus £187.20 in his accounts, because the rate and hours are commercial and documented.

If Sam instead paid Priya £25,000 a year for the same 8 hours, HMRC would argue that the excess over a commercial rate is not wholly and exclusively for the trade and disallow it, as the court did with excessive pay in Earlspring Properties Ltd v Guest, listed at BIM47105.

What evidence should I keep?

  • A written job description and contract showing duties and hours.
  • Timesheets, diaries or system logs showing the work was done.
  • Evidence of market rates for similar work, which is what BIM47106 comparators look for.
  • Payslips and payroll submissions, since PAYE operation is accepted as evidence of payment.
  • Bank records showing payment into the relative’s own account, not credited back to you as in Moschi v Kelly.
  • Records of any pension contributions, which form part of the package HMRC reviews.

Good business records are what turn a reasonable claim into one that survives an enquiry.

What mistakes come up most often?

  • Posting a round sum wage by journal at the year end with no payment and no payroll.
  • Paying young children amounts that look like pocket money, the exact facts in Dollar v Lyon.
  • Setting a spouse’s pay to use up their Personal Allowance rather than to reflect the hours worked.
  • Including payments to yourself in staff costs. The SA103F notes for box 19 say not to include payments to yourself, your own pension payments or your own National Insurance.
  • Paying an adult child who lives elsewhere below the minimum wage on the assumption that the family exemption applies.

For a wider view of what counts as a deductible cost, see allowable business expenses.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.