New company - when to start paying yourself a salary?

New business

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 commonly used to deny a tax deduction for salaries paid to members of a director’s family as evidenced by the tribunal’s decision in Alan Nicholson v HMRC (2018). 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.

onsider 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).