Staff salaries & wages

Conditions

• Employee and staff salaries, bonuses, and wages are allowable costs. GOV.UK's self-employed expenses guidance explicitly lists 'employee and staff salaries, bonuses, pensions, benefits' as allowable staff costs (updated November 2024). The deduction is available to sole traders who employ staff and to limited companies paying wages to employees and directors.
• Salaries must be paid through PAYE and reported via Real Time Information (RTI) — each payment must be reported to HMRC on or before the payment date. A salary not run through PAYE is harder to substantiate as an allowable deduction and may attract HMRC scrutiny.
• A sole trader or partner cannot pay themselves a salary and deduct it — the proprietor's own remuneration is drawn from the business profit (drawings), not wages. Only wages paid to employees of the business are an allowable cost.
• For a limited company, a director's salary is a legitimate corporation tax deduction, provided it is formally approved by the board, is reasonable for the role, and is processed through PAYE. Many directors take a salary up to or near the National Insurance threshold alongside dividends — a decision that should be taken with professional advice.
• Salaries paid to family members or connected persons are allowable where the payment passes the wholly-and-exclusively test: the amount must be determined by the commercial value of the work done, not the personal relationship. HMRC's Business Income Manual (BIM47105) states that 'equal pay for equal value is fully allowable' regardless of personal connection. Where a relative is paid more than a third party would be for identical work, HMRC may disallow the excess element; in some cases it may reclassify it as the owner's own income (BIM47106). The excess alone is challenged — not the entire salary.

Common mistakes

• A sole trader treating their own drawings as a wage and attempting to claim a deduction — the proprietor's own remuneration is not an allowable staff cost.
• Paying a family member a salary significantly above the market rate for the actual work done, without documentation to justify the level.
• Failing to run salaries through PAYE and RTI, making it harder to evidence the payment as a legitimate business cost.

What to keep

• Payroll records showing gross pay, PAYE deductions, and National Insurance contributions per employee per period.
• RTI submissions confirming payments were reported to HMRC on time.
• An employment contract for each employee, including family members, setting out the role, duties, and rate of pay.
• For family member salaries where the rate might be questioned, evidence that it is consistent with what an unrelated person would be paid for the same work.

Real-world example

A sole trader runs a small retail shop and employs her husband part-time at £14,000 per year to manage social media, stock photography, and customer enquiries — roughly 15 hours per week. This is consistent with market rates for the role. The salary is run through PAYE and is allowable in full. Were she paying him £35,000 for the same hours, HMRC would be likely to challenge the excess as not commercially justifiable.

Frequently asked

Related allowances