A Guide to Directors

What is the difference between a director and an employee?

The distinction between a director and an employee lies in their roles, responsibilities, and legal status within a company.

An employee works under a contract of employment and performs specific tasks as directed by their employer. They receive a salary and are typically entitled to employment benefits. Employees are not automatically considered statutory officers of the company.

A director, on the other hand, is a statutory officer appointed under the Companies Act 2006. Directors are responsible for the strategic direction and governance of the company and are bound by specific statutory duties.

How are directors remunerated?

Under UK tax law, any payments made to directors in respect of their directors’ duties must be treated as earnings. Such payments must be processed through the payroll and are subject to PAYE tax.

Unlike regular employees, National Insurance Contributions for directors are calculated on an annual cumulative basis rather than weekly or monthly.

Where directors are also shareholders, they may receive dividends, provided the company has sufficient distributable reserves and the directors and shareholders have approved a dividend.

What is the difference between executive and non-executive directors?

An executive director is a board member who also holds a full-time operational role within the company. They are typically employees and are involved in the day-to-day management of the business.

A non-executive director (NED) is not involved in daily operations. NEDs often hold other roles and may serve on multiple boards.

NEDs are appointed to their role on the board by a letter of appointment, not an employment contract. They are still subject to the statutory duties of directors under the Companies Act 2006.

What about non-resident directors?

If a director performs any duties in the UK, the UK company must apply PAYE, regardless of the director’s tax residence or whether they are paid by a non-UK entity.

If a director receives a single salary for duties performed globally, it is necessary to apportion the amount attributable to their UK duties.

Board directors cannot typically be reported under the Short-Term Business Visitor Agreement (STBVA). Even a single day of work as a director in the UK can trigger PAYE obligations.

For Australian directors STBVA removes the need to operate PAYE for short term visits.

National Insurance Contributions for non-resident directors can become complex and may be impacted by their country of residence, the nature and frequency of their UK duties and other matters. You are always advised to take advice on each specific scenario.