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Chartered Certified Accountants
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Can a director be paid before trade begins?

New Companies often incur start-up costs before they begin trading. But… is it sensible from a tax and NI point of view for directors to start taking income before the business generates money?


The amount and type of start-up costs which businesses incur vary widely, as can the time it takes for them to begin trading. Special tax rules exist to allow relief for these. The key feature of the rules is that expenditure incurred up to seven years before trade commences qualifies for tax relief; its treated as though it were incurred on the first day of trading.


An important condition for pre-trading expense is that tax relief is only allowed if the cost would be deductible if trade had already started. Usually, this won’t cause any trouble, but the condition might be more of a problem for a director’s salary.


HMRC’s approach to tax relief for salaries is that they must not be disproportionate to the work done for the business. This argument is most commonly used to deny a tax deduction for salaries paid to members of a director’s family as evidenced by the tribunals decision in a 2018 case. Therefore, if a director’s salary is not justifiable during pre-trading period, a tax deduction isn’t permitted.


A director’s job before their company starts trading might be different in many ways to that after trading has commenced, but that doesn’t make it any less necessary for the business. Only the director’s will know how much salary they can justify. You shouldn’t therefore run into problems with HMRC overclaiming pre-trading salary unless very high. Aside from justifying the salary the other limited factor can be tax and NI efficiency.


Dividends are usually the most tax-efficient income. However, they can’t be paid in the pre-trade period because company law only permits them when the company has profits. At the pre-trading stage profits are zero. Therefore, salary is the only option if a director wants or needs cash income in the pre-trading period.


The principles of tax and NI efficiency apply for the pre-trading period as they do when the business is up and running. The optimum amount of salary will depend on how much other income the director has already received in the tax year. However, there can be more certainty over NI efficiency. A director’s salary will be free of NI where it doesn’t exceed the annual lower earnings threshold. This is £8,424 for 2018/19, but is reduced proportionately where the director is appointed part-way through the year. Also, if you need income in a pre-trade period, rather than take a potentially tax and NI inefficient amount, limit it to the NI-free threshold and borrow the rest. The loan is NI-free if the money is repaid once the company has started trading. This doesn’t have to be immediately, and can be a tax-free or low-tax option.

24 Jul 2018

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