BTX - when is salary disallowable?

topcat
topcat Registered Posts: 452
in AAT Level 4 (Level 8 in Scotland)
Hello again,

Got my self confused with this so need to check i am understanding correct.
Unincorporated company - directors salary disallowable expenditure add back on to net profit. --edit or any drawings
Incorporated company - directors salary is allowable expenditure
is this right?

Comments

  • CeeJaySix
    CeeJaySix Registered Posts: 645
    Yes - if the business is not incorporated then salary to the owners (not directors as such) is (usually) added back to profit and instead debited to drawings; this is because they and the company are one and the same, so they are effectively just giving themselves money and it is not a trading expense. It is however not uncommon in partnerships to have salaried partners (usually where some partners work full time in the business whilst others have an interest but do not commit their working life to it - salaries are paid (and taxed at source through the payroll) to those who essentially run the firm from the P&L; the profits after this are then distributed to all the members per the partnership agreement.

    Incorporated companies are a separate legal entity with separate funds from the owners, and director's salaries are an expense to the P&L. They can of course also take drawings through their director's loan account as well, and be paid dividends (assuming they are also shareholders) - all methods should be considered depending on the circumstances of the company, directors and members, especially in smaller owner-director companies where a combination can be the most tax-effective.
  • topcat
    topcat Registered Posts: 452
    CeeJaySix wrote: »
    Yes - if the business is not incorporated then salary to the owners (not directors as such) is (usually) added back to profit and instead debited to drawings; this is because they and the company are one and the same, so they are effectively just giving themselves money and it is not a trading expense. It is however not uncommon in partnerships to have salaried partners (usually where some partners work full time in the business whilst others have an interest but do not commit their working life to it - salaries are paid (and taxed at source through the payroll) to those who essentially run the firm from the P&L; the profits after this are then distributed to all the members per the partnership agreement.

    Incorporated companies are a separate legal entity with separate funds from the owners, and director's salaries are an expense to the P&L. They can of course also take drawings through their director's loan account as well, and be paid dividends (assuming they are also shareholders) - all methods should be considered depending on the circumstances of the company, directors and members, especially in smaller owner-director companies where a combination can be the most tax-effective.

    Thanks for the great explanation really appreciate your help :thumbup1:

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