Does the National Minimum Wage apply to limited company directors?

By law, employers in the UK must pay a minimum amount on average for the hours an employee works. For those under the age of 23, or who are apprentices, this amount is referred to as the National Minimum Wage. But for those over 23-years-old, it’s called the National Living Wage.

The National Minimum Wage in a contractor limited company setting

But does the National Minimum Wage apply to limited company directors? Unfortunately, the answer isn’t straightforward, writes Matt Fryer, managing director of Brookson Group.

That said, typically, the National Minimum Wage (NMW) does not apply to limited company directors unless they have contracts of employment with their company. The main reason for this can be explained by looking at the differences between the legal status of being a director and that of an employee. So really, we need to ask:

What are the differences between being a ‘director’ and an ‘employee?’  

A director is usually paid by way of remuneration as the holder of an office, by the company’s Articles of Association.

Generally, an office-holder is responsible for the day-to-day operation of the company, while a director is responsible for overseeing the management and running of the company.

However, all company directors are also office-holders, and hence carry out the duties and responsibilities that come with being an office-holder. These are statutory, irrespective of whoever is holding the office.  

A director can be voted out of office by the shareholders of the company. In such a case, a director is not an employee for the purposes of the National Minimum Wage. In comparison, an employee who has a contractual relationship with his employer can only be dismissed by termination of their contract. An employee’s rights and duties are defined by the contract between them and the employer.

Can I be both a director and employee?

It is also important to note that being a director and an employee are not mutually exclusive.

An individual who holds the office of director of a company may also be employed by the same company under a contract. In such an instance, they would be entitled to the NMW, like any other employee, for the work done under the contract. If that’s you, the company would also be obliged to automatically enrol you in their company pension scheme.

What are the benefits of a director opting not to be treated as an employee?

Directors' remuneration can be compensated either through fees, salary or any other benefits approved by the shareholders/director of your limited company. As a sole/majority director shareholder of your Personal Service Company (PSC), opting not to have a contract of employment does confer certain tax benefits.

For example, the current NMW rate is £10.42 an hour (rising to £11 per hour from April 2024). On a 40-hour week, the annual remuneration is £21,674.00 which will attract PAYE/NI above the personal tax-free allowance of £12,570.

Also, if looking to pay your director fee at the National Minimum Wage level, care must be taken that the NMW wage rate is wholly preserved, particularly if a salary sacrifice pension arrangement (where an employee sacrifices part of their salary to be paid back via pensions) is present. This arrangement can impact the NMW rate and there are penalties for not taking it under consideration under the NMW regulations..

What do most contractors do with wages, dividends and paying themselves?

In most cases, a director of the PSC would look to maximise their profit-extraction strategy by utilising a standard tax planning strategy of taking a small salary and dividends from their company (in addition to reviewing their company pension contributions).

In these circumstances, opting to take your director’s fee at the level of the personal allowance (£12,570) to utilise your tax-free eligibility, generally results in no PAYE/Employee’s NI due, with the residual amount taxable at lower dividend rates of 8.75%/33.75%/39.35% for basic rate/higher rate and additional rates respectively, compared to taxes on employment income of 20%/40% and 45% respectively.

Finally, not being paid the NMW is sensible, HMRC-compliant tax planning for most PSCs

For a principal director/shareholder of a PSC, then, taking a director’s fee and not having a contract of employment in place -- and as a consequence not being paid at National Minimum Wage rates -- is primarily a matter of tax planning. Foregoing the requirements to comply with employment law regulations obliged under a contract of employment may be beneficial for a director in these circumstances, with regard to flexible pay.

However, we would always recommend speaking to your accountant or financial adviser in respect of your company tax-planning strategy, to ensure it fits with your personal circumstances. 

Tuesday 17th Oct 2023
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Written by Matt Fryer

Matt is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements. Matt is also a Board member of the FCSA, the UK's leading membership body dedicated to promoting supply chain compliance for the temporary labour market.

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