PAYE & Non-Executive Directors

Delving into the realm of PAYE (Pay As You Earn) for non-executive directors presents a landscape of unique challenges and considerations. In this guide, AAB sheds light on the intricacies of PAYE as it pertains to non-executive directors. From understanding tax implications to navigating compliance requirements, this article equips both directors and organisations with the knowledge needed to understand this complex aspect of corporate governance effectively.

Off-Payroll NED Payments Under HMRC Spotlight

Non-executive directors (NEDs) play a hugely valuable role in most organisations and we are seeing an increase in NED payments being made ‘off-payroll’ (i.e. without deduction of tax or NIC via PAYE).  This incorrect practice is attracting more attention from HMRC.

Basic premise

HMRC’s starting point is that NEDs should be treated in the same way as executive directors for PAYE purposes. This is because both executive and non-executive directors are regarded as officeholders.

As an office holder, individuals are taxed in relation to their director fees under s5 ITEPA 2003 and s3 SSCBA 1992. Payments falling under these provisions are subject to PAYE and NIC via the payroll.

Self employed NEDs

HMRC does not accept that NEDS can carry out office holder duties in a self-employed capacity. This is either as a self-employed individual or engaging through an intermediary. However, a NED may also provide consultancy services to the same company, and this consultancy arrangement can be considered on a self-employed basis where the duties are separate as explained further below.

Personal service companies

There is a current practice of NEDs invoicing for their directors’ duties via a personal service company (PSC). The NED may receive, via the PSC, fees relating to several unrelated companies with which they hold offices. Historically, many had held the view that such fees could be paid gross to the PSC: importantly, HMRC has never subscribed to this view.

In most cases, the NED, not the PSC, was personally appointed to the director role. There has been much debate over whether fees paid to the PSC for the owner personally carrying out director duties should be subject to PAYE and NIC via the payroll. Following the changes to the IR35 rules effective in the public sector from 6^th April 2017 and medium and large-sized private sector businesses from 6^th April 2021, the responsibility for assessing the employment status of the NED now sits with the engager. When appointing NEDs to your Board, the standard approach should be to remunerate them as employees, regardless of whether they seek to engage via an intermediary. Incorrectly remunerating your NEDs who operate via a PSC can result in the underpaid tax and National Insurance becoming due by the engager, rather than the NED themselves. Hence, it is imperative NEDs are remunerated correctly, as incorrectly remunerating them off-payroll can be costly.

Consultative services

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

The usual employment status tests must be considered with respect to the consultancy services alongside the engagement structure 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. As outlined above, following the reforms to IR35 rules in April 2021, any medium or large sized engager will have a responsibility to assess the employment status of any Personal Service Companies providing consultancy services.

Although these changes will not impact the treatment of income relating to office holder duties, this may invalidate any arrangement for genuine consultancy work to continue to be paid gross via invoicing.

Non-Executive Director? Let AAB Handle Your PAYE

Understanding the complexities of PAYE for non-executive directors is essential for both directors and organisations alike. As outlined in this guide, navigating the nuances of tax implications, compliance requirements, and best practices is crucial for maintaining transparency and adhering to regulatory standards.

At AAB , we specialise in providing expert guidance and support in handling PAYE matters for non-executive directors. With our in-depth knowledge and experience, we can assist you in ensuring compliance with HMRC regulations while optimising tax efficiencies.

Whether you’re grappling with , personal service companies, or consultancy services, our team is equipped to provide tailored solutions to meet your specific needs. By partnering with AAB Group, you can be assured that your PAYE obligations are handled efficiently and effectively, allowing you to focus on driving your organisation forward with confidence.

For more information please contact Niamh McKenna (Niamh.mckenna@aab.uk) or your usual AAB contact.

To find out more about the Payroll and Employment Taxes team, click here.