Staff costs are one of the main, if not the main, cost for many business. In general the costs associated with employing staff are deductible in computing the profits of the business. There are, however, some points to bear in mind.
General rule
The general rule is that for business expenses to be deductible they must be incurred wholly and exclusively for the purposes of the business. The cost of employing staff will satisfy this requirement.
Wages and salaries
The main cost of employing staff is the wages and salaries that are paid to them. These are deductible in computing the business profits of the business. In addition to the amounts that are paid to staff, the employer can also deduct NIC and PAYE paid over to HMRC. Employer’s NIC is also deductible.
Any business that employs staff will need to comply with payroll obligations and deduct PAYE and NIC and pay it over to HMRC. It is important that these obligations are taken seriously as penalties for failure to comply can be hefty. It is also important that payments of PAYE and NIC are paid over to HMRC on time each month as penalties are charged if payments are made late on more than one occasion in the tax year.
Benefits in kind
An employee’s remuneration package may include more than just the employee’s wage or salary. The employee may also receive non-cash benefits, such as a company car or private health care. The cost to the employer in providing these benefits is also deductible in computing the profits of the business.
In many cases the employee will be taxed on the benefit in kind. The amount on which the employee pays tax is the cash equivalent of the benefit. Depending on the nature of the benefit, this will not necessarily be the same as the cost to the employer of providing the benefit. However, it is the actual cost that is deducted as a business expense, not the amount on which the employee is taxed.
Unless the benefits provided to employees are exempt from tax and National Insurance, the employer will also have to pay Class 1A National Insurance contributions. Any Class 1A National Insurance paid is also deductible in computing taxable business profits.
Pension contributions
An employer may make contributions to either an occupational pension scheme or to the employee’s personal pension plan. Pension contributions are also deductible in computing the profits of the business, as long as they meet the general requirement that they have been incurred wholly and exclusively for the purposes of the business. The deduction is given in the accounting period in which the contribution is paid.
Where very large abnormal contributions are made (at least £500,000 more than in the previous period) the rules require that relief is spread over more than one period.
Statutory payments
At some point most employers will be required to make statutory payments – statutory maternity pay, statutory paternity pay, statutory adoption pay and statutory sick pay – to an employee. The costs to the employer of making statutory payments are deductible as for payments of wages or salary. Depending on the size of the employer, the employer may be able to recover some of the costs of any statutory payments made from HMRC.
Dividends
In family companies it is common to pay a small salary and to extract further profits by way of a dividend. It should be noted that dividends can only be paid out of retained profits.
Although dividends may be regarded as a staff cost, there is no deduction for dividends as they are paid out of after tax profits.
Sarah Bradford
