Staff salaries & wages

Conditions

1. GOV.UK's self-employed expenses guidance lists employee and staff salaries, bonuses, pensions and benefits among the staff costs you can claim. A limited company deducts the costs of running its business to work out its taxable profit before paying Corporation Tax.
2. The test is statutory: section 34 ITTOIA 2005 for unincorporated businesses and section 54 CTA 2009 for companies prevent a deduction unless the expenditure is incurred wholly and exclusively for the purposes of the trade (BIM37007). HMRC adds that remuneration to an employee, including a director, calculated as a share of the profits of the business is normally allowable (BIM47100).
3. A sole trader cannot deduct their own pay. GOV.UK states that allowable expenses do not include money taken from your business for personal use.
4. Timing: where remuneration charged in the accounts is not paid before the end of the 9 months after the end of the period of account, no deduction is allowed for that period; it is deducted in the period in which it is paid (section 36 ITTOIA 2005, section 1288 CTA 2009, BIM47105). For a company, section 1288 allows no deduction for remuneration that is not paid.
5. Pay to a relative or friend is not automatically disallowed. HMRC states that where there is equal pay for equal value the amount paid is fully allowable, notwithstanding any connection between payer and recipient. Where there is a non-trade purpose to the remuneration, or the amount is determined by the relationship, it is not allowable; where only a definite part or proportion fails the test, only that part or proportion is disallowed (BIM47105).
6. For a company's controlling director whose work generates the company's income, HMRC says the level of the remuneration package is a commercial decision and it is unlikely that there will be a non-trade purpose for it. Remuneration does not include entitlement to dividends arising as a shareholder (BIM47106).
7. Where pay to a relative is demonstrably in excess of what is commercially reasonable, HMRC may also consider whether it is really part of the controlling director's own remuneration or the proprietor's drawings, and, where it is paid to the husband, wife or minor child of a controlling shareholder or director, whether the settlements legislation applies (BIM47106).
8. Employees have no specific relief for paying someone to help with their own job. An employee's general deduction is under section 336 ITEPA 2003, which HMRC calls very restrictive: all of its tests must be passed (EIM31630).

Common mistakes

• A sole trader treating their own drawings as a wage and claiming a deduction. GOV.UK states allowable expenses do not include money taken from your business for personal use.
• Paying a relative significantly more than third parties doing the same work. HMRC treats that as an indicator that there may be a non-trade purpose to the remuneration (BIM47105).
• Accruing a bonus or salary at the year end and paying it more than 9 months after the end of the period of account. The deduction then moves to the period in which it is paid.

What to keep

• Payroll records showing gross pay, PAYE deductions and National Insurance per employee per period.
• An employment contract for each employee, including family members, setting out the role, duties and rate of pay.
• For pay to a relative or friend, evidence of what unconnected employees are paid for similar work. HMRC says the chosen comparators need to have similar qualifications, experience and job description (BIM47106).

Real-world example

A sole trader runs a small retail shop and employs her husband part-time at £14,000 a year to manage social media and customer enquiries — about 15 hours a week, in line with what she would pay an unconnected employee for the role. Because it is equal pay for equal value, HMRC's guidance is that the amount is fully allowable, notwithstanding the relationship (BIM47105). Were she paying him £35,000 for the same hours, the part above a commercial rate would be at risk: where a definite part or proportion of remuneration is not laid out wholly and exclusively for the trade, HMRC disallows that part or proportion (BIM47105).

Frequently asked