Allowable deductions for employee related expenses

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Allowable deductions for employee related expenses
  • Dividends and drawings
  • Salaries and wages
  • Accrued remuneration
  • Termination payments
  • Pension contributions
  • Benefits in kind
  • Travel costs
  • Entertaining and gifts
  • Fines and penalties
  • Training costs

This guidance covers some common types of business expenditure which may be disallowable for tax purposes. Some of these are disallowable under specific statutory rules and some are disallowable on general principles. For guidance on these, see the General principles ― companies or the General principles ― sole traders and partnerships guidance notes.

In this guidance note, unless otherwise stated, references to ITTOIA 2005 are relevant for sole traders / partners and references to CTA 2009 are relevant for companies.

Dividends and drawings

It is important to distinguish between an expense of earning profit and an application of profit. This essentially means distinguishing between payments to employees and profit extraction by the owner. Dividends and drawings are not allowable deductions.


For companies, profits are appropriated by way of payment of dividends which are not allowable for tax purposes. See the Taxable Total Profits (TTP) guidance note. Likewise, drawings of profit by a sole trader or partnership are not allowable for tax purposes.

For partnerships primarily, and some sole traders, it is possible that drawings will be included in the profit and loss (P&L) account. Whatever the reason for their inclusion, it does not change the nature of the payment as a drawing of profit. It is never allowable.

This extends to personal expenditure incurred directly by the business. This is seen as an application of profits, rather than an expense of earning. See the Trading profits of a partnership guidance note for further information on partnerships’ profit allocation.

Salaries and wages

The costs of employing staff is typically allowable provided it meets the criteria of being ‘wholly and exclusively’ for the purposes of the trade. This includes their wages or salary, and any benefits in kind received.

CTA 2009, s 54; ITTOIA 2005, s 34

Where remuneration is excessive, it

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