Are company directors self-employed?

What employment status do the UK’s 2 million company directors have?

In this guide, we’ll cover the main aspects of the working arrangements of company directors and how this impacts the business’ finance and taxes. Find out:

• How company directors are employed
• How your employment impacts your taxes
• How your employment impacts the company’s accounting
• How your employment can change over time
• Your employment status if you undertake other work

Navigating tax codes can be complex and time-consuming. Find out how Countingup can help below.

Company directors are considered office holders and employees of the business. 

Directors are considered ‘office holders’ because they have a statutory appointment within the company – all companies must have a director. However, directors are also considered employees because they can receive regular dividend payments, often handle additional work beyond their duties as a director, and enjoy company benefits. Examples of these can include: 

• The work they undertake to run the business’ marketing, sales, and inventory management.
• Usage of the company’s car, phone, computing devices, and more.

Employee status also allows directors to compensate themselves for company work at a more favourable rate than dividends offer alone. 

Because companies are considered legally distinct entities, directors are employed by the company even though they run the company. Therefore, company directors are not self-employed. 

For this reason, you must register the company as an employer. 

Like most employees, company directors have their income taxed via PAYE income tax. This allows the use of your personal allowance (currently set at £12,570), with additional income taxed incrementally. 

Note that income tax rates differ slightly depending on where in the UK you live. Therefore, be sure to charge the correct rates as you may be obligated to back-pay any priorly unpaid taxes. Consider using payroll software and an accountant to help manage these differing rates.

As a shareholder in your company, you may also be required to pay tax on dividends. Like a personal allowance, you can receive up to £2,000 in dividends and may forego tax contributions some years based on this threshold. 

As a company director, you’ll need to choose how you calculate your national insurance contributions if your salary and bonuses are over £9,568. Depending on whether you’re paid regularly or not, you can use the standard or alternative method.

Finally, if you have any outstanding student loan payments that you qualify to pay back, these must also be calculated at the current levels. Find out more about the rates and thresholds for student loans here.

As a director, you’ll need to set up a payroll record for yourself for your PAYE income. This is to keep track of what you’ve paid (as the employee) and what the company has paid (as your employer).

The company must make three payments:

• A salary payment made to you, with all employee deductions at the correct rates (income tax, NI, student loans, etc).
• Employee deductions paid to HMRC.
• Employer contributions for national insurance paid to HMRC.

As with any other aspect of running a business, your employment tax arrangements can change over time as government legislation is updated and adapted. Therefore, as the company director, you’ll need to make sure that the company complies with all necessary regulations.

Similarly, where legislation changes, it may have an impact on your personal take-home figure. You may find you can reduce your tax liability through different accounting methods. For example, using a combination of reducing your base salary, avoiding voluntary national insurance contributions, and maximising your dividend and personal allowances.

As your company expands, you may wish to take on additional staff. This will change the nature of your employment as the necessary work that justifies your employee status may be delegated. Therefore, consider updating your employment contract to reflect the evolving nature of your business.

So far, we’ve discussed directors’ employment status as if their sole working arrangement is through their company. In the earliest days of setting up a company, some people may hold other employment contracts or work arrangements until they can build their business up to be viable on its own.

For example, you might have a day job and run your company in your spare time (regardless of whether you work full or part-time in your day job). It’s your hope that you’ll be able to build your new business enough that you can leave your day job and work solely as the company director. 

In this example, depending on the nature of your work, you may have to file for self assessment. Otherwise, if you have an employment contract, any income will be taxed as PAYE as normal. Avoid emergency tax rates or unnecessarily high contributions by making sure your tax codes are correct for any employment contract you have.

Managing payroll and navigating expenses for your business can be confusing and difficult. Save time and stress in other parts of your business with Countingup.

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