Recently we have been asked whether a shareholder employee’s salary is deductible for a LTC (Look Through Company) and whether it can be paid without having to deduct PAYE.

There are two parts to the question one being the deductibility of the shareholder employee’s salary and another being the PAYE withholding.

  • SHAREHOLDER SALARY
    • The LTC is allowed a deduction for the shareholder salary, insofar as the shareholder is a working owner employed by a LTC.
    • There must be an employment contract pursuant to which salary is paid for services performed by the working owner.
    • The employment contract must specify the amount of salary to be paid and terms and services to be performed by the working owner.
    • The available deduction is limited to the salary payments authorised by the contract of employment. A bonus is also deductible even if not specifically provided for in the employment contract.
    • The working owner status is not achieved if the LTC is wholly or mainly engaged in investing, holding or dealing in shares, securities or land.  The LTC must derive an active as opposed to passive income.
    • The working owner providing services to the LTC is therefore classified as an employee.
  • PAYE
    • PAYE has to be deducted from the salary paid to the working owner.
    • The definition of a PAYE income payment includes salary, wages, extra pay, etc (this would cover bonuses as well)
    • The term salary and wages specifically includes payments to the working owner of a LTC

In Summary:

  • The LTC is allowed a deduction for salaries, wages and bonuses paid to the working owner pursuant to the employment contract.
  • PAYE must be deducted.