PAYE & Non-Executive Directors

BLOG26th Feb 2019

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 practise is attracting more attention from HMRC enquiry officers.

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 office holders.

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 it is possible for NEDs to carry out office holder duties in a self-employed capacity. However, a NED may also provide consultancy services to the same company and it is the nature of the consultancy arrangement which determines its tax and NIC treatment.

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 he or she holds 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.

However, as a catch-all, the changes to IR35 contained in Finance Act 2013, impacted PSCs that receive NED fees gross from 6 April 2013 onwards. From then, where either:

(i)    the NEDs are individuals appointed as directors of the engaging company, or

(ii)   their PSCs are appointed as corporate directors of the engaging company but the NEDs personally perform the non-executive director duties,

the IR35 rules must be operated. These changes apply because, as a matter of law, a NED holds the office of non-executive director in a personal capacity and is therefore an office holder for the purposes of the legislation. These changes brought IR35 for income tax purposes into line with the equivalent NIC legislation, which already applies to office holders.

Where IR35 applies for income tax and NIC, the PSC is obliged, generally at the end of the relevant tax year, to deduct PAYE and account for Class 1 NIC on all gross payments received by the company in respect of the NED’s duties. These rules give HMRC the power to use IR35 to scrutinise whether any fees received for consultancy should be reclassified as fees deriving from the office holder’s duties.

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. However, 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 in our recent experience, deem the liability to rest with the client for whom the NED role is being carried out.

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.

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 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.

A key point to take note of here is the changes in the IR35 legislation which are planned to be implemented for the Private Sector from April 2020. As part of this, the position of contracts held with NEDs via intermediaries should be reviewed to confirm if they are caught by IR35 as the responsibility for this review will be moving from the intermediary itself to the end client.

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.

For more information please contact Charlotte Edwards ( or your usual AAB contact.

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


For further information on the IR35 changes, please see our blogs –

All Change for IR35

A resounding thumbs down for proposed IR35 changes?

IR53, Private sector look out!