There has long been a common misconception that the payment of fees to non-executive directors can be made without having to account for tax and National Insurance (NI) by way of the PAYE (Pay as You Earn) system.

Directors, non-executive or otherwise, are considered to be “officeholders” by HM Revenue and Customs (HMRC) and, employers are required to operate PAYE on any payments made. Failure to do so will result in the company being liable to fines and interest.

Some people think that putting a director on the payroll automatically makes them an employee and gives them employment protection rights and redundancy rights. Not so. Under legislation going back to 1972 PAYE must be accounted for on income from “employment or from holding an office”. The two are quite separate and just being on the payroll doesn’t give a director any of the rights enjoyed by an employee. Of course if the director is an executive director then he or she does have employment rights.

Fees paid to Personal Service Companies

It is quite common for non-executive director to have their fess paid into a Personal Service Company (PSC). This is usually done in the belief that the provisions of the PSC legislation -commonly known as “IR35” – will apply. Under IR35, a PSC is required to account for tax and NI by way of the PAYE system on all fees paid to it by the ultimate employer, subject to limited deductions for expenses. Unfortunately the IR35 provisions specifically exclude fees paid to directors. See “Related Articles” below for more information on IR35.

As explained above, as office holders, directors are not treated in the same manner as other workers. This leaves the employing company liable to account for tax on the amounts paid to the PSC – even if the PSC has already accounted for tax. The PSC would, however, under those circumstances, retain the responsibility to account for NI.

Extra-Statutory Concession

Fees can be paid gross to a limited company by way of an Extra-Statutory Concession under certain limited circumstances. The terms of the concession allow for fees to be paid gross where one company has the right to appoint a director to the board of another. Such a right will usually arise from a shareholding that one company holds in another. As long as the fees are paid to the company (and not to the director personally) they may be paid gross as long as the receiving company is chargeable to corporation tax and accepts responsibility for the tax liability due on the fees. However, as with all Extra Statutory Concessions it is open to HMRC to disapply their use in cases where they consider that the “spirit” of the concession has not been followed.

Consultancy Fees

Directors often receive payment in the form of consultancy fees. The correct treatment of such fees will depend on the nature of the duties performed. Payment for any duties that one would normally expect to be performed by a non-executive director must be subject to the appropriate deductions for tax and NI via the PAYE system. If, however, the non-executive director performs other duties for the company it may be possible for such payments to be made by way of a PSC or indeed to a company in business of providing such consultancy services to a number of clients in which case it would fall outside the IR35 legislation and be treated as normal trading income not subject to PAYE or NO. However, the non-director duties must be clearly identifiable and distinct from any work undertaken in the individual’s capacity as a director.


In most cases HMRC take the strict approach in respect of payments made to directors, and invariably the look to the company to account for tax and NI in the first instance. Even if PSCs have accounted for tax and National Insurance due on such payments, there is no guarantee that the strict criteria allowing the set-off of tax and NI already paid will be met – raising the possibility of the same amounts being subjected to tax and NI twice.

If you would like any further information or advice on this matter, or on IR35 in general, please contact mail@jamesgreenandco.co.uk

Related Articles

Category: Taxation

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