Family Tax Planning for Agency Owners: Paying Yourself (and Your Family) Smartly

As business owners, we often pour our energy into growing the business, winning clients, and building our teams. Meanwhile, optimising how we pay ourselves falls to the bottom of the priority list. But here's the reality: strategic family tax planning can save you thousands of pounds each year while securing your family's financial future.

At Sidekick, we've helped hundreds of agency owners implement tax-efficient payment structures. The difference between a basic approach and a well-planned strategy can equate to a luxurious family holiday or a significant boost to your pension each year.

Let's explore practical, HMRC-compliant ways to structure income for you and your family.

The Foundations of Agency Owner Remuneration

Before diving into family tax planning, you need to understand the basics of how to pay yourself efficiently.

Agency owners typically extract value from their business through a combination of:

• Salary: Subject to income tax and National Insurance Contributions
• Dividends: Taxed at lower rates but require available profits
• Pension contributions: Tax-efficient long-term planning
• Benefits: Company cars, health insurance, etc.

The most tax-efficient approach for most agency owners continues to be a salary up to the National Insurance threshold (£12,570) combined with dividends. This strategy minimises National Insurance while preserving state pension eligibility.

Maximising Family Tax-Free Allowances

Family tax planning elevates your strategy by using family members' tax allowances. Each family member has:

• £12,570 personal allowance
• £500 dividend allowance
• £1,000 trading allowance (for self-employed work)
• Pension contribution allowances

Collectively, these create significant tax-saving opportunities.

Consider an agency generating £150,000 in profit. If one director takes all income, they'll hit higher rate tax bands quickly. By involving a spouse as a shareholder or employee, you can utilise two sets of allowances and potentially keep both individuals in the basic rate tax band.

This arrangement could save up to £10,000 annually in tax – substantial money that remains in your family's pocket rather than going to HMRC.

Strategic Ways to Involve Your Spouse

Involving your spouse in your agency creates multiple tax planning opportunities:

1. Employing Your Spouse

If your spouse performs genuine work for the business, paying them a salary makes excellent tax sense. Their role might include:

• Managing agency finances
• Handling admin tasks
• Leading certain client projects
• Managing business development

For this to be HMRC-compliant:

• The work must be genuine and necessary
• Pay must be commercially reasonable for the work performed
• Proper documentation (employment contract, timesheets, etc.) should be maintained
• PAYE should be operated correctly

2. Making Your Spouse a Shareholder

For established agencies with consistent profits, making your spouse a shareholder allows dividend income splitting. This approach works particularly well when:

• Your spouse has no or low other income
• You're already in the higher tax bracket
• The agency has strong, consistent profitability

You can either:

• Issue new shares to your spouse (consider using different share classes)
• Gift existing shares (no Capital Gains Tax between spouses)

With careful planning, dividends can then be distributed to utilise both of your basic rate bands efficiently.

Involving Children in Your Tax Planning

Children can also play a role in family tax planning, though different rules apply depending on their age.

Adult Children (18+)

Adult children can be employed or made shareholders like any other family member. If they're university students or in early career stages with low income, they can use their personal allowance and basic rate tax bands advantageously.

Roles might include:

• Social media management
• Website maintenance
• Basic content creation
• Administrative support

Minor Children (Under 18)

HMRC scrutinises arrangements involving minor children more closely, but legitimate opportunities exist:

• Employment: Children can be employed for age-appropriate tasks at reasonable wages
• Junior pensions: You can contribute to a junior pension (up to £3,600 gross annually)
• Junior ISAs: While not directly tax-saving for you, contribute up to £9,000 annually tax-free

Remember that the "settlements legislation" prevents income shifting purely for tax purposes – any arrangements must have commercial substance.

Advanced Shareholding Structures

For agency owners with substantial profits or planning for eventual exit, more sophisticated structures are worth considering:

Family Investment Companies (FICs)

A Family Investment Company is a private company where family members hold shares. The agency pays dividends to the FIC (potentially at lower corporation tax rates), which can then invest or distribute income according to a tax-efficient strategy.

Benefits include:

• Corporation tax rates lower than personal tax rates
• Control over income distribution timing
• Potential inheritance tax advantages
• Asset protection

Alphabet Shares

Implementing different share classes (often called "alphabet shares") provides flexibility in dividend distributions. This structure allows you to:

• Distribute different dividend amounts to different shareholders
• Maintain control while sharing tax benefits
• Adapt distributions based on changing family circumstances

Critical Pitfalls to Avoid

Even with the best intentions, family tax planning can go wrong. Here are the main pitfalls to avoid:

1. Insufficient Documentation

HMRC may challenge family arrangements without proper documentation. Always maintain:

• Formal employment contracts
• Board minutes approving salary/dividend decisions
• Timesheets for family employees
• Evidence of work performed

2. Unrealistic Remuneration

Pay family members at commercial rates for the work they do. Paying your spouse £50,000 for 5 hours of basic admin weekly will raise red flags.

3. Dividend Illegality

Dividends must come from available profits. Paying dividends when the company is loss-making is illegal and can lead to personal liability.

4. Settlements Legislation

Be aware that arrangements created primarily to divert income to family members may be challenged under settlements legislation. All arrangements should have genuine commercial purpose.

Making Family Tax Planning Work for Your Agency

Effective family tax planning requires balance. You need strategies that are:

• Legally compliant
• Administratively practical
• Commercially realistic
• Aligned with your family dynamics

The right approach varies based on your agency's size, profitability, and family situation. What works for a £100K profit agency differs from what suits a £1M profit business.

Take Action on Your Family Tax Strategy

Family tax planning represents one of the most significant opportunities for agency owners to protect their hard-earned money. While basic salary and dividend planning might save you thousands, comprehensive family tax planning can multiply these savings.

At Sidekick, we specialise in creating effective tax strategies for agency owners. Our approach considers your unique family circumstances, business goals, and risk tolerance to create a plan that keeps more money in your family's hands.

Ready to stop overpaying tax and start building more wealth for your family? Book a consultation with our specialist agency accountants today. We'll review your current approach and identify opportunities to implement these strategies in your business.

Book Your Family Tax Planning Review →

‍