Allowable deductions for employee-related expenses

Produced by Tolley

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

  • Allowable deductions for employee-related expenses
  • Salaries and wages
  • Directors’ remuneration
  • Relatives
  • Accrued remuneration
  • Dividends and drawings
  • Termination payments
  • Pension contributions
  • Benefits in kind
  • Travel costs
  • More...

Allowable deductions for employee-related expenses

This guidance note covers the tax treatment of some common types of trading expenditure relating to employees. Some of these are disallowable under general principles, for example the wholly and exclusively test or capital versus revenue expenditure. Some are disallowed under specific statutory rules. For guidance on these, see the Adjustment of profits ― overview guidance note.

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.

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 wages or salary, plus any benefits in kind.

Where remuneration is excessive, it is possible that a deduction may be challenged on the basis of not being for the purposes of the trade. This will normally only be applicable to remuneration of individuals who are connected to the business in some way.

When considering the level of remuneration, the whole package of remuneration, comprising salary, wages, benefits in kind, pension contributions and other perquisites must be considered. This does not include dividends received.

It is rare for remuneration to be disallowed on the grounds that it is capital. However, it might apply where employees have devoted significant time to the creation or acquisition of capital assets. This is most likely to relate to situations where construction workers perform work on their own premises or legal advisers reorganise their own business structures.

Any disallowance of salary costs will also apply to employer’s Class 1 or Class 1A NIC.

Directors’ remuneration

HMRC accepts that it is unlikely that controlling directors will have a non-business purpose in their level of remuneration, so their salary costs are usually allowable.

However, non-controlling directors remuneration packages are more open to question, especially where they are a relative or a friend of the owner. These may be compared with the

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