Directors’ fees - can you escape PAYE?

Directors

The job of director is often misunderstood, especially if they’re also the sole shareholder. If you’re in that situation you’ll have two roles: first, ensuring that your company meets its statutory obligations; and, second, actively taking part in the company’s business activities.

Directors who aren’t active in the company’s business are known as non-executive directors (NEDs).

Special tax rules apply to NEDs and working directors’ income. It is treated as employment income, because as a director they are an “office holder”, and therefore liable to PAYE tax and NI.

Off-payroll rules

Because payments to NEDs and other directors count as employment income for tax and NI purposes the off-payroll rules can apply if the relevant conditions are met.

Consequently, it isn’t usually possible to dodge PAYE tax and NI by diverting income derived from a directorship to your company. The effect of the off-payroll rules requires that all employment income is taxed as such.

There are two exceptions where the special PAYE tax and NI rules do not apply, and consequently neither do those relating to off-payroll work.

First exception - freelance work

If you’re paid for work you do for a company on terms which don’t amount to an employment, the company can pay you without applying PAYE tax and NI.

Example. Terry, who is a plumber by trade, is the sole shareholder and director of a building firm, Acom Ltd. Most days he works as a self-employed (sole trader) plumber for private customers. However, from time to time he works on site with Acom’s employees and subcontracts. He bills Acom for the work from his sole trader business. Neither PAYE nor NI contributions apply despite Terry being a director shareholder of Acom.

Draw up a separate agreement for freelance work and submit invoices for payment.

Second exception - directors’ fees

A company is permitted to pay you as a director in respect of your role in ensuring that the company meets its statutory obligations without applying PAYE tax and NI contributions. The main condition is that you were appointed as a director by another company or a partnership. The other conditions are:

• the partnership or company receiving the directors’ fees is taxed on them as income; and either
• the appointing partnership or company has the right to appoint the director by agreement with the other company or because it owns shares in that company; or
• the director alone or together with others connected with them doesn’t control the appointing company.