Your son does the deliveries on Saturdays and some evenings in the school holidays. Your wife does the books, the VAT return and most of the phone calls. Neither has a contract. One is paid in cash when there is cash, the other is paid a salary chosen by your accountant because it is tax-efficient.
Both arrangements are common. Both are also, in different ways, a problem waiting for a specific trigger: an HMRC enquiry, an accident, a divorce, or a falling out that nobody can walk away from because they live in the same house.
Employment law does not have a family exemption
If a family member works for you under a contract of employment, they are an employee, with the same rights as anyone else. There is no relative's exception in the Employment Rights Act 1996 and no separate regime for a spouse.
That means a written statement of employment particulars on or before the first day of work, holiday under the Working Time Regulations 1998, statutory sick pay if they qualify, pension auto-enrolment if they meet the earnings and age criteria, and protection from unfair dismissal once the qualifying service is met. It also means that if you dismiss your sister-in-law after a row, she can bring a claim, and the tribunal will be interested in the process rather than the family history.
The National Minimum Wage Act 1998 applies too, and this is where an assumption catches people. There is a narrow exemption for a worker who is a member of the employer's family, lives in the family home, shares in the tasks and activities of the household, and is not charged for accommodation or meals. It was drafted for a family business where a relative genuinely lives as part of the household. It does not cover a son who lives at home and works in the shop on a proper rota for pay, and HMRC reads it narrowly. Assume minimum wage applies unless you have taken advice that says otherwise.
The National Living Wage and the other rates are set each April on the recommendation of the Low Pay Commission. From April 2025 the National Living Wage for workers aged 21 and over was £12.21 an hour, with lower rates for 18 to 20 year olds, for those under 18 and for apprentices in their first year. Those figures rise most years, so check the current rate before you set a wage.
Children have their own rules, and they are local
For a child under school leaving age, employment is governed by the Children and Young Persons Act 1933 and by byelaws made by each local authority, which vary between councils.
The general shape: no employment below the age of 13, no work during school hours, limits on hours before and after school and at weekends, no work before 7am or after 7pm, and prohibited types of work including most work involving machinery, heights or alcohol sales. Many councils require an employment permit issued before the child starts. The minimum wage does not apply below school leaving age, which does not mean paying nothing is a good look.
This is worth taking seriously even in a small family shop, because it sits alongside your health and safety duties. The Management of Health and Safety at Work Regulations 1999 require a specific risk assessment for young workers, taking account of their inexperience and lack of awareness of risk.
HMRC's test is whether the money bought work
You can pay a family member a salary and deduct it against your profits. The condition, for a company under the Corporation Tax Act 2009 and for the self-employed under the equivalent income tax rules, is that the expense is incurred wholly and exclusively for the purposes of the trade.
For a genuine employee doing genuine work at a commercial rate, that is straightforward. For a spouse paid £30,000 for two hours a week of light administration, it is not, and HMRC will disallow the excessive part. The deduction is tested against what you would have paid someone at arm's length for the same work.
What protects you is evidence, and it is the same evidence any employer should have anyway:
- A written contract or statement of particulars, describing the actual job.
- A record of hours or duties, kept as it happens rather than reconstructed afterwards.
- Payment through PAYE, reported under Real Time Information on or before each payday, with the money actually leaving the business bank account and arriving in theirs.
- A wage that you could defend as the rate for the job if the person were a stranger.
Paying in cash with nothing recorded fails all four. It also leaves the family member with no National Insurance record, which matters for the state pension, and no evidence of income when they apply for a mortgage.
Dividends are a different route with different rules. Shares held by a spouse or civil partner are usually protected by the exemption for outright gifts between spouses, which is what the House of Lords decision in Jones v Garnett was ultimately about, but the settlements legislation still catches arrangements where income is diverted to a family member who has no real interest in the shares. Shares given to adult children, or shares of a class carrying only a right to dividends, are the arrangements that attract attention.
The argument that outlasts the business
The commercial risks are ordinary and manageable. The family risks are the ones that close businesses.
Two people related to each other disagree about money in a way two strangers do not. If your brother is the operations manager and is not performing, the conversation that would be routine with an employee is not routine with him, and the usual outcome is that nobody has it for two years. If a marriage ends, the shareholding, the salary and the working relationship end up in the same negotiation.
The protections are dull and they work. A shareholders' agreement setting out what happens if a shareholder leaves, divorces or dies. A written job description with an actual line manager, even if that is you. A salary review at the same time as everybody else's. And the discipline of dealing with performance the same way you would for anyone, which is kinder in the end than the alternative of resentment building for years.
Where this shows up in the game
Business Baron lets you staff a business with family, and it models what that actually does: cheaper loyalty early on, harder conversations later, and a payroll that HMRC checks like any other. Pay someone below the legal minimum and the liability accrues quietly until an inspection finds it. The relationships in the game have a memory, which is the part most business simulations leave out.