New company – when can you start to pay yourself a salary?
You have set up a new company but need to find premises before trading can begin. But can you take a salary from the business in the meantime? Naomi Swan advises below.
As you’re probably aware, in most circumstances dividends are the most tax and NI-efficient way to take income from a company. The trouble is you can’t do this until the company has made profits from which dividends can be paid. Therefore, salary is the only option if you want cash income.
A director can take a salary from a company before it begins trading and it will receive tax relief for the cost under the pre-trade expense rules. These allow a tax deduction for expenses paid up to seven years before trade commences. These count as if they were a cost incurred on the day the company starts to trade.
Conditions
Tax relief for pre-trading costs are allowed for any expense that would be deductible once trade has begun. This condition might be tricky to meet in respect of 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 often used to deny a tax deduction for salaries paid to members of a director’s family. Therefore, if a director’s salary is not justifiable during the pre-trading period, a tax deduction isn’t permitted.
How much is reasonable?
Your role in the company before it starts trading will differ from than after trading has commenced, but that doesn’t make it any less necessary for the company’s business. Only you know how much time and effort is involved and so how much salary is justifiable. You shouldn’t therefore run into problems with HMRC over claiming pre-trading salary unless it’s very high.
Tax efficiency
The same principles of tax and NI efficiency apply for the pre-trading period as they do for salary paid when the business is up and running. The optimum amount of salary will depend on how much other income you have in the tax year.
NI efficiency
A director’s salary will be free of NI (employers’ and employees’) where it doesn’t exceed the employers’ earnings threshold. This is £9,100 for 2024/25 (£5,000 for 2025/26) but is reduced proportionately where the director is appointed part-way through the year. For example, if a director was appointed exactly half-way through 2024/25, the NI threshold is reduced to £4,550.
You could consider employing or appointing another director to help with setting the business up, say your spouse or unmarried partner. By paying them above the employers’ earning threshold for just one week your company will qualify for the employment allowance. This reduces the employers’ NI bill by up to £5,000 (£10,500 for 2025/26).
IN SUMMARY
Taking a salary from your company before it starts to trade is equally as tax efficient as one taken after it has commenced. Your company is entitled to a tax deduction as if the whole of the pre-trade salary had been paid on the first day of trade. You can pay yourself as much salary as is justifiable for the work you do. Paying someone else, say your spouse or unmarried partner, to help with pre-trade work can reduce NI costs.
Please do contact our team for any further queries you may have in relation to business start up.
