• Bear traps for directors' fees and salaries

    Claire Murray, Employment Tax Director

Bear traps for directors' fees and salaries

Correctly determining the PAYE and NIC treatment of directors continues to challenge many businesses, and in the Financial Services sector the complexity of the corporate structure and potential global reach adds additional difficulty.

In the UK, both executive and non-executive directors are considered to be “office holders” for income tax and National Insurance Contribution (NIC) purposes.  There is no distinction, therefore, in the way that fees or remuneration paid to them for carrying out their respective director duties should be treated for income tax and NIC purposes.  The basic position is that fees or remuneration paid to both executive and non-executive directors for undertaking director duties should be subject to PAYE income tax withholding and NIC.

Consultative services

Non-executive directors may provide consultancy services in addition to fulfilling their director duties.  To mitigate the risk of HMRC challenge that all fees paid should be subject to PAYE and NIC, the consultancy services should be distinct and separate from the director duties, and the contractual arrangements between the parties should reflect the two different relationships. 

The usual employment status tests must be considered in respect of the consultancy services, to determine whether it is correct to pay fees for consultancy services gross without deduction of PAYE and NIC.  Employment status continues to be an area of HMRC focus, and arrangements will be subject to particular scrutiny when a non-executive director is providing consultancy services in addition to director duties.

Personal service companies

An area of continuing uncertainty in terms of PAYE and NIC obligations is the engagement and payment of directors via their own companies rather than through payroll.

Since 6 April 2013, the “IR35” legislation has captured fees received by Personal Service Companies in connection with director’s duties for both PAYE and NIC purposes.  What is less clear is whether a primary obligation to operate PAYE and NIC remains with the payer.  HMRC appear to apply the legislation inconsistently, and a close examination of the facts and relevant documentation is required to determine the risks to the payer, if payments are to be made outside of payroll.  If neither the Personal Service Company nor the director are tax resident in the UK, then it should be assumed the obligation to operate PAYE and NIC rests with the payer.

Within the financial services sector and fund backed businesses, individuals may have been appointed by a company or partnership for whom they work (as employee, director or partner) to be a director of another company, e.g. in an oversight role.  If so, it may have been agreed that fees in connection with their position as a director should be paid to the company/partnership for whom they work, either as specific director fees or as part of management charges. 

As noted above, it should be assumed that PAYE and NIC must be operated, but an Extra-Statutory Concession (A37) exists which may relieve the requirement to operate PAYE (with a similar concession for NIC) in some circumstances.  The facts should be fully understood, particularly if the receiving company is outside of the UK, before concluding that PAYE and NIC do not need to be operated.

Overseas directors

Another area of complexity is the UK PAYE, and potentially NIC, obligations which are likely to exist in connection with non-UK resident directors, unless the directors’ duties are carried out wholly overseas. 

It may be possible to relieve the requirement to operate NIC in full, and reduce the amount of income from which PAYE needs to be withheld, depending on the facts. 

This will depend on:

  • the director’s country of residence for income tax and social security purposes
  • what tax and social security treaties exist between those countries and the UK
  • whether fees are being paid by the UK company or as part of overall remuneration from an international group
  • how much time is spent working in the UK

Unless a limited NIC concession applies, UK NIC should be operated except where valid evidence of continuing overseas social security obligations is obtained and held on file (e.g. Certificate of Coverage, or A1 (within the EU)).  Likewise, PAYE should be operated in full unless agreement to the contrary has been obtained from HMRC, which may cause operational difficulties if remuneration is paid overseas.

Travel and subsistence

Finally, it is worth mentioning that directors’ travel and related subsistence for attendance at board meetings may be considered to be commuting to a permanent workplace, rather than business travel.  The income tax, NIC and reporting implications will depend on the facts, and for non-resident directors specific exemptions may be available for certain travel costs.


In conclusion, when fees or remuneration are paid to or on behalf of directors of UK companies it should be assumed that PAYE and NIC must be operated.  Only once all facts have been considered against the legislation, treaties and concessions, and HMRC agreement sought where appropriate, should fees be paid gross.

Claire Murray, Employment Tax Director