Directors’ Remuneration 2025/26: Our Guide for New Director-Owners

Salary, Dividends, Pensions, and the Sweet Spot of PAYE and Dividend Planning

A Quick(ish) Summary for Director-Owners with No Time to Read

PAYE is not a burden — it’s a tax planning opportunity, especially for cash-poor start-ups

Directors can run PAYE for themselves without parting with cash and gain significant advantages. Once the salary is processed through PAYE, it is treated as paid even if the net salary is undrawn. This secures Corporation Tax relief, utilises personal allowances and can earn State Pension credits.

Actively involve your spouse or a dependant in the business and trigger the Employment Allowance

Actively involve your spouse or a dependant in the business, and you can trigger the Employment Allowance (worth up to £10500) and use tax free salaries to reduce Corporation tax. This is the sweet spot of PAYE planning for director-owners. If a spouse or dependant is actively involved in the business at a salary above the Secondary Threshold (£5,000 p.a – or between 5 and 10 hours work per week), you can unlock up to £10,500 in Employment Allowance, wiping out employer NI and enabling higher director salaries tax-free. If the company’s profits allow, a director could take a salary of £75000 in a year without paying any employer’s NI!

National Insurance contributions protect your State Pension entitlement

A salary at or above the Lower Earnings Limit (£6,500 in 2025/26) secures a qualifying year for state pension purposes. At this level, the Employers NI is £225 for the entire year (less than £4.50 per week). Contrast this with the cost of buying back lost years by paying Voluntary Class 3 contributions of £17.75 per week (about £923 per year). This is a cheaper option.

Use it or lose it: the £12,570 personal allowance

Any part of the £12,570 personal allowance not used by the end of a tax year (5th April) is lost forever. Regardless of your company’s accounting year-end, once you pass the 5th April, you must have used your personal allowance. No employee’s NI or Income tax is payable on £12570 (if that is the only income received in that tax year), but it is worth £2388 in corporation tax relief at 19%. The employer’s NI at that level is £1136 (unless you have qualified for EA), which is also subject to Corporation Tax relief.

Dividends are not deductible expenses

Dividends are not deductible expenses. They are distributions of profit and do not reduce Corporation Tax in the way salaries do – this is especially important for companies with taxable profits above £50000, where the marginal rate is 26.5%. Furthermore, unlike salaries, dividends do not generate NI credits for state pension purposes or relevant earnings for private pension planning purposes. Although dividends do have their place for every director-owner’s tax planning when companies are more established and are fully utilising their EA. They also attract an individual allowance of £500 per recipient in 25/26.

The 10 Essentials of Directors’ Remuneration Planning

• PAYE Registration Requirements for 2025/26 (Abridged)

  For the 2025/26 tax year, HMRC has set the Secondary Threshold (ST) at £96 per week, £417 per month, or £5,000 per year.A company must register as an employer and operate PAYE if any of the following apply:

  Condition – Requirement

  • Salary: You pay any employee or director a salary of £5,000 or more per year (£96 per week / £417 per month).
  • Benefits/Expenses: You provide taxable benefits or expenses of any value, such as a company car, private medical insurance or reimbursed bills.
  • Other Employment/Pension: : You employ someone who already has another job or is receiving a pension.

  If all employees and directors are paid less than £5,000 per year and receive no benefits, no pension income, and have no second job, then the company does not need to register for PAYE. However, once the salary reaches £5,000 or more, or if any benefits, second jobs or pensions are involved, PAYE registration is mandatory even if no tax or National Insurance is actually payable.

  In summary, PAYE registration is not required for companies paying very low salaries with no additional benefits, but it becomes compulsory as soon as the £5,000 threshold is crossed for one individual or any of the other conditions are met.

• Why You Should Run PAYE Even If Your Company Has No Cash with which to Pay You

  Directors’ pay can still be charged in the accounts without the company having to hand over cash immediately. There are two alternative approaches to doing this, and each has different implications for corporation tax, a director’s personal tax, and National Insurance.

  Making a provision in the accounts

  One option is to make a provision in the company’s first accounts for directors’ pay that has not yet been processed through PAYE. HMRC allows the corporation tax deduction, but only if the salary is actually put through PAYE within nine months of the accounting year end. If it is not, the deduction is only given in the later year when the salary is finally processed.

  This approach has several drawbacks.

  • The director’s personal allowance is wasted if PAYE is not run in the same tax year.
  • Lower-rate tax bands may also be wasted, and
  • No National Insurance is paid, so you lose a qualifying year for state pension purposes

  Running payroll but leaving the pay unpaid

  A second option is to process the salary through PAYE straight away and then credit the net pay to the director’s loan account (or wages payable). This counts as “paid” for PAYE purposes, even though no cash has actually been withdrawn from the company.

  The PAYE and National Insurance consequences of this approach at key salary levels in 2025/26 are as follows:

  Gross Annual Salary	Income Tax	Employee NI	Employer NI (without EA)	Employer NI (with EA)	Comment
  £5,000	£0	£0	£0	£0	At or below the trigger for employer’s NI.
  £6,500	£0	£0	~£225	£0	Creates a qualifying year for NI purposes.
  £12,570	£0	£0	~£1,135	£0	Uses the full personal allowance; no tax or employee’s NI, but employer’s NI is payable above £5,000.

  The key point is that once salaries exceed £5,000, the employer’s NI becomes payable, even if the net salary remains unpaid. PAYE and NI must still be reported and paid to HMRC on the usual deadlines, but the cash owed to the director can remain as a balance in the loan account until the company can afford to pay it.

  Important: Employer’s NI is not payable if the company qualifies for the Employment Allowance (EA). This point is explained in more detail later in the blog.

• Payroll for Directors is Calculated Differently for Directors

  One of the most common misunderstandings is assuming directors are treated like ordinary employees. In fact, payroll for directors is calculated differently. HMRC applies special rules, known as the annual earnings period basis, which means that National Insurance Contributions (NICs) for directors are assessed over the whole tax year rather than on a week-by-week or month-by-month basis.

  Accordingly:

  • Some or all of a director’s salary can be delayed until the end of the tax year without penalty.
  • A director’s salary can be delayed until a spouse/civil partner or dependant can be added to the payroll,if the aim is to trigger EA before processing higher levels of pay.
  • Ordinary employees,including a spouse are assessed on the normal earnings period rules, so directors need to plan differently for other staff.

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• Paying a Spouse, Civil Partner, or Dependant Through PAYE

  Many director-owners can benefit if their spouse or dependant contributes to the running of the business. A contribution to the administration of a company can be carried out at convenient times and locations to suit the spouse or dependant. Administrative functions can include bookkeeping, invoicing, paying bills, payroll, administrative support, marketing, website management, and social media management. These tasks are recognised as wholly and exclusively for business purposes, meaning the related salary qualifies for corporation tax relief.

  Where the spouse or dependant has little or no other income, paying them for this work allows them to use their personal allowance so that some or all of the salary may be tax-free. In households where one person is paying higher or additional rate tax, sharing the work of running the company with a spouse or dependant can reduce the overall household tax bill.

  Salary levels and their implications in 2025/26 corporation tax relief applies at rates between 19% and 26.5%, depending on the company’s profit levels.

  Gross Annual Salary	Income Tax	Employee NI	Employer NI	Comment
  Below £5,000	£0	£0	£0	No PAYE scheme required. Partial use of personal allowance.
  £5,000 or above (Secondary Threshold)	£0	£0	NIL (EA triggered)	Triggers the Employment Allowance (£10,500).
  Above £6,500 (Lower Earnings Level)	£0	£0	NIL (EA triggered)	Provides a qualifying year for state pension.
  £12,570	£0	£0	NIL (EA triggered)	Uses the full personal allowance.

• The Contentious Point: Salary Without Work

  For corporation tax purposes — that is, when deciding if a salary can be deducted from a company’s profits to reduce the tax bill — salaries to a spouse, civil partner, or dependant must be “wholly and exclusively” for business purposes. If little or no work is done to justify that salary, the expense will be disallowed.

  The catch is that directors may be tempted to assign titles like Director or Company Secretary simply to add the spouse to the payroll to trigger the Employment Allowance (EA). As the NIC rules (National Insurance Contributions Act 2014) do not apply the “wholly and exclusively” test, so EA can be unlocked even where the salary itself would not qualify for corporation tax relief.

  This means that even if the salary is not deductible for corporation tax, it can still trigger the £10,500 Employment Allowance. In practice, an unjustified salary functions much like a dividend — but with the added advantage of activating the EA.

  Important: This approach sits in a grey area. There is no explicit anti-avoidance clause in the EA legislation that we know of but HMRC could still challenge arrangements that appear artificial. Furthermore HMRC can always challenge such an arrangement up to 6 years down the line (and more in certain circumstances). So it would be irresponsible to assume that the arrangement has worked simply because there has been no challenge in the first few years the payroll has operated. Directors should always take professional advice before relying on this.

• National Insurance Contributions (NIC) and State Pension Eligibility

  When starting a business, it is easy for founders to forget the basics, such as State Pension entitlements. Your entitlement to the new State Pension depends on how many qualifying years of National Insurance (NI) contributions or credits you build up during your working life.

  How do you earn a qualifying year?

  • Through work: Paying Class 1 NI as an employee, or Class 2 NI if you are self-employed.
  • By earning between thresholds: In 2025/26 the Lower Earnings Limit (LEL) is £6,500 per year and the Primary Threshold is £12,570. If you earn between these figures, you do not pay employee NI, but the year still counts as qualifying.
  • By earning above the Primary Threshold: You pay employee NI, and the year counts.
  • Through NI credits: For example, if you receive Child Benefit while caring for a child under 12, or specific benefits such as Jobseeker’s Allowance, Employment and Support Allowance, or Carer’s Credit.
  • By making voluntary contributions: Gaps can be filled by paying Class 3 NI, which in 2025/26 costs £17.75 per week (around £923 for a full year).

  How many years are needed?

  • 35 qualifying years are required for a full new State Pension (£221.20 per week in 2025/26).
  • Between 10 and 34 years gives a proportionate pension. For example, 20 years provides 20/35ths of £221.20 = £126.35 per week.
  • Fewer than 10 years means no entitlement at all.

  Why this matters for company directors

  Director-owners who take very low or nil salaries risk missing qualifying years. If your annual salary is below the LEL (£6,500 in 2025/26), the year does not count towards your pension record.Once missed, the only way to fix it is by buying Class 3 contributions later at around £923 per year. This is poor value compared to setting a salary correctly through PAYE at the time of employment. Just one qualifying year can add over £11,500 of lifetime pension income (assuming 10 years of retirement).

  Planning point: To count, the salary must be processed and paid through PAYE within the tax year — late adjustments don’t qualify.

  Worked examples (2025/26)

  Annual Salary	Qualifying Year?	Income Tax	Employee NI	Employer NI (without EA)	Employer NI (with EA)	Comment
  £6,500	Yes	£0	£0	~£225	£0	Achieves qualifying year at no cost if the EA is available.
  £12,570	Yes	£0	£0	~£1,135	£0	Full use of personal allowance; qualifying year at no cost if the EA is available.

  Key takeaway

  To secure the full State Pension, you need 35 qualifying years. Missing years can reduce retirement income dramatically. For directors, setting a salary at or above the LEL (£6,500 in 2025/26) is usually the simplest and most cost-effective way to protect long-term entitlement.

• Pension Contribution Rules for Directors

  Pensions vs Dividends

  Many director-owners assume that dividends are the most tax-efficient way to take profits from their company. Dividends avoid National Insurance, which makes them an attractive option as part of the overall director-owner’s pay package. But if one of your goals is to build a pension, dividends alone are a poor strategy.

  There are two options available to director-owners

  1: Pay personal pension contributions out of net personal income.

  Net personal income is salary under PAYE, and taxed benefits, dividends and other income.Payments to a personal pension scheme are made net of basic rate tax of 20% (even in Scotland, where the basic rate band is 19%). Higher-rate relief on the pension contribution is only available later through Self Assessment.Contributions to a personal pension scheme are restricted to the higher of 100% of relevant UK earnings (capped at £60000) and £3600 gross per year.Net relevant earnings do not include dividends or any other source of unearned income.

  2: The company (Employer) makes the pension contributions

  When your company contributes directly to your pension:

  • The payment is deductible against corporation tax, reducing your company’s corporation tax bill immediately. At the 26.5% marginal rate, the saving is substantial.
  • The contribution is not subject to personal tax at basic or higher rates or the employer’s or employee’s NI.
  • There are no net relevant earnings calculations that restrict the amount you can contribute.
  • There is an upper limit of £60000 per year.

  Unutilised allowances

  Both schemes have provisions for carrying forward unutilised pension contributions:

  You can use unused annual allowance from the previous three tax years, in addition to your current year’s £60,000 allowance.

  That means, in theory, you could contribute up to £240,000 in 2025/26 (£60k current + £180k from three earlier years).

  Condition: You must have been a member of a UK-registered pension scheme during the years you want to carry forward from (even if you didn’t contribute).

  Relevant earnings still matter for personal contributions

  Even with carry forward, your personal contributions are still capped by 100% of relevant UK earnings in the current tax year. If your relevant earnings are low (e.g. only a £10,000 salary), then even though you technically have unused annual allowance, your personal contributions that qualify for tax relief can’t exceed £10,000.In that case, only employer contributions let you use the carried-forward allowance fully.

  SIPPs and SSASs

  Director-owners of newly formed companies are usually keen to build up reserves in the early years of a company’s life. They will often reject the idea of pouring contributions into a pension and losing access to those funds. However, there are a couple of pension schemes which can offer interesting possibilities:

  • SIPPs (Self-Invested Personal Pensions): Give directors freedom to invest in shares, funds, gilts, or commercial property.
  • SSASs (Small Self-Administered Schemes): Offer even greater flexibility. An SSAS can lend up to 50% of its assets back to the sponsoring company (secured and on commercial terms), or invest directly in commercial property,such as offices or factories

  This means pension savings don’t have to sit passively — they can, within limits, be recycled to support the business while still benefiting from tax relief.

• Salary vs Dividends: The Real Picture for Directors

  One of the first questions new director-owners ask is: “Should I pay myself by salary or dividends?” Many company formation sites give a neat answer: “Take a small salary and the rest as dividends.” While that can sometimes work, it is far from universal. The best strategy depends on consideration of the Employment Allowance, the Corporation Tax bands, personal allowance tapering, pension planning, and a company’s capital requirements. Ignore these, and you risk losing thousands in unnecessary tax.

  Why this matters for director-owners

  In large companies, directors have to balance the interests of staff, shareholders, and long-term growth. But for director-owners, the focus is usually different,in particular:

  • How much cash ends up in the director’s hands?
  • What can be sheltered in pensions?
  • What remains in the company for reinvestment?

  That is why the overall position — after Corporation Tax, Income Tax, National Insurance, and dividends — is what really matters.

  The Four Key Factors that determine the best outcome

  • Employment Allowance (EA)

    EA is worth £10,500 in 2025/26 and offsets the Employer’s NI. If the company has at least one other employee earning £5,000 or more, EA applies.With EA, a director can take a salary up to £75,000 can be taken without Employer’s NI.Without EA, Employer’s NI at 15% above £5,000 makes higher salaries less efficient.

  • Corporation Tax at 26.5%

    Profits between £50,000 and £250,000 are taxed at 26.5%. Salary and employer pension contributions are deductible, so they reduce profits taxed at this high rate. Dividends are not deductible – they are paid from post-tax profits, so a company owner will suffer Corporation Tax first, then dividend tax.

  • The 60% Personal Allowance Trap

    Between £100,000 and £125,140, the personal allowance tapers away at £1 for every £2 of income.This creates a punishing 60% effective marginal rate of tax.Salary or dividends taken in this range are extremely inefficient. Switching remuneration to employer pension contributions can reduce taxable income below £100k, restoring the personal allowance.

  • Employer Pension Contributions

    Employer contributions are deductible at 26.5%, free of NI, and not capped by your personal “relevant earnings.” SIPPs offer wide investment choice; SSASs can lend up to 50% of assets back to the company on commercial terms.For director-owners planning long-term, pensions often outperform both salary and dividends.

  Example of a company making £200,000 Profit Before Drawings

  Assume a company earns £200,000 profit before drawings, pays a £25,000 employer pension contribution, and qualifies for EA up to a £70,000 salary.

  Option A: Salary of £70,000

  Profit after pension and salary = £105,000.

  Corporation Tax = £24,075.

  Retained profit = £80,925.

  On the £70,000 salary, the director pays £15,432 Income Tax and £4,165 NI.

  Net salary = £50,403.

  Outcome:

  • Cash to director: £50,403
  • Pension: £25,000
  • Profit retained by the company: £80,925
  • Total post-tax resources: £156,328

  Option B: Small Salary (£12,570) + Dividends

  Profit after pension and salary = £162,430.

  Corporation Tax = £39,296.

  Retained profit = £63,134.

  Dividends of £60,000 attract £10,825 tax, leaving £49,175 net.

  Adding £12,570 salary, total cash = £61,745.

  Outcome:

  • Cash to director: £61,745
  • Pension: £25,000
  • Profit retained by the company: £63,134
  • Total post-tax resources: £149,879

  Option C: All Dividends (£100,000)

  Profit after pension = £175,000.

  Corporation Tax = £42,625.

  Profit retained by the company = £32,375.

  Dividends of £100,000 attract £24,322 tax, leaving £75,678 net.

  Outcome:

  • Cash to director: £75,678
  • Pension: £25,000
  • Retained profit: £32,375
  • Total post-tax resources: £133,053

  What this shows

  All dividends put the most immediate cash in the director’s pocket, but they waste Corporation Tax relief and starve the company of retained profit. The blend balances personal cash and company retention, but it still underperforms the salary-heavy route. Salary of £70,000 plus a pension contribution is the clear winner, producing £156,328 of total post-tax value – more than £23,000 higher than the dividends-only option.

  Why “dividends are always better” is misleading.

  Some guides push the idea that dividends are always superior to salary. That advice is dangerously simplistic:

  • Dividends don’t reduce Corporation Tax.
  • Dividends don’t count as relevant earnings for pension contributions.
  • Dividends don’t protect State Pension entitlement.
  • Dividends can even be clawed back if the company faces difficulty a few years later and is liquidated.

  Director-owners of small companies need to give serious consideration to how they remunerate themselves. Dividends do attract a £500 allowance but beyond that the calculation is far from simple.

• Alphabet Shares for Spouses, Civil Partners, and Dependants

  Another way director-owners can plan their income is by issuing alphabet shares (different classes of shares, such as “A,” “B,” “C”). Each class can receive different dividend rates, giving flexibility in how profits are shared within a family.

  Benefits

  • Tax-efficient use of allowances: A spouse or dependant with unused personal allowance (£12,570 in 2025/26) or within the basic-rate band (20%) can receive dividends taxed at just 8.75%, compared with the director-owner paying 33.75% or 39.35%.
  • Flexibility: Alphabet shares allow dividends to be paid in different amounts to different shareholders, rather than strictly pro rata. For example, “B” shares might carry voting rights but lower dividends, while “C” shares might be dividend-only.
  • Family income planning: Dividends can be spread across the adult members of the household, lowering the total family tax bill. This is especially effective where one spouse or dependant has little or no other income.
  • Dividend allowance: Each shareholder has their own £500 dividend allowance (2025/26). By spreading dividends, a director-owner household can multiply this allowance, doubling it for a couple, or more if other adult family shareholders are involved.

  Restrictions and Risks

  • Settlements legislation (ITTOIA 2005, Part 5, Ch. 5)

    HMRC can apply the “settlements” anti-avoidance rules where they believe an arrangement is really a device to divert income, rather than a genuine transfer of rights. In practice, this means that if a director-owner issues or gifts shares to a spouse, civil partner, or dependant, but continues to control or benefit from the income those shares produce, HMRC may argue that the dividend income should still be taxed on the original shareholder.

    The key test is whether the transfer is an “outright gift” of ordinary shares carrying genuine rights (such as voting and capital rights). If it is, and the recipient is a spouse or civil partner, the spousal exemption (s.626 ITTOIA 2005) normally protects the arrangement from the settlements rules. But where the shares are restricted, artificially structured (for example, “dividend-only” shares with no real rights), or where the giver retains control or access to the benefit, HMRC may seek to treat the dividends as still belonging to the original shareholder.

  • Gifts to minor children

    If a parent gifts shares to a minor child, dividends over £100 per year per parent are taxed as the parent’s income (s.629 ITTOIA 2005). This restriction does not apply to adult children.

  • Company law limits

    Alphabet shares must be properly authorised in the company’s articles of association and issued formally with board minutes and shareholder resolutions. Poor drafting risks HMRC challenging them as “disguised remuneration” rather than genuine share rights.

  Worked Example: Spouse with £5,000 Salary and Director in Higher Rate Tax Band

  This example looks at how a household can reduce its overall tax bill when a company distributes £20,000 in dividends. The director is in the higher-rate tax band, and the spouse already earns a £5,000 salary from the company. We will compare the outcome when all the dividends are taken by the director, versus when the dividends are shared between the director and the spouse using alphabet shares.

  Scenario 1: Director takes all £20,000 in dividends

  The director receives the full £20,000 dividend. The first £500 is covered by the dividend allowance and is tax-free. The remaining £19,500 is taxed at the higher-rate dividend tax rate of 33.75%.

  • Dividend allowance: £500 (tax-free)
  • Taxable dividends: £19,500 × 33.75% = £6,581
  • Dividend tax = £6,581

  Net to director: £20,000 – £6,581 = £13,419

  In this case, the household only receives £13,419 after tax from the £20,000 dividend distribution.

  Scenario 2: Dividends split with spouse (£10,000 each) + spouse has £5,000 salary

  Here, the £20,000 of dividends is split equally between the director and the spouse. The spouse already has a £5,000 salary, which uses part of their £12,570 personal allowance.

  Spouse:

  • Salary: £5,000 (leaves £7,570 of personal allowance unused)
  • Dividends received: £10,000
  • £7,570 covered by personal allowance
  • £500 covered by dividend allowance
  • Taxable dividends: £10,000 – £7,570 – £500 = £1,930
  • Dividend tax: £1,930 × 8.75% = £169

  Director:

  • Dividends received: £10,000
  • £500 covered by dividend allowance
  • Taxable dividends: £9,500 at 33.75% = £3,206

  Combined outcome:

  • Total dividend tax: £169 + £3,206 = £3,375
  • Net dividends received: £20,000 – £3,375 = £16,625

  In this case, the household receives £16,625 after tax from the same £20,000 dividend distribution.

  Result of Comparison

  • Without spouse shareholding (Scenario 1): household receives £13,419 net.
  • With spouse shareholding (Scenario 2): household receives £16,625 net.
  • Household saving: £3,206.

  On top of this, paying the spouse a £5,000 salary helps the company qualify for the Employment Allowance, which can reduce employer National Insurance contributions.

  Key Takeaway

  By introducing alphabet shares and sharing dividends between spouses:

  • Household income can be spread more tax-efficiently.
  • The company also gains from the Employment Allowance.
  • Even modest dividend reallocation can deliver thousands of pounds in tax savings.

  Planning point: Shares must be genuine, properly structured, and supported by the company’s articles. Dividends to minors are restricted. Professional advice should always be taken before implementing this strategy.

  Myth vs Reality: HMRC and Alphabet Shares

  • Myth: HMRC will always challenge alphabet share arrangements.
  • Reality: The Arctic Systems case (2007) confirmed that properly structured gifts of ordinary shares to a spouse are fully acceptable. What HMRC attacks are contrived or artificial setups — not genuine family shareholdings.

• Paying Non-Resident Directors: Do You Still Need to Run PAYE?

  The UK does not insist on director-owners bein UK resident and it’s not unusual for UK companies to have directors who live overseas. But this raises a key question: if the director is non-resident, do you still need to put them on PAYE?

  The short answer: yes — at least for their UK duties. The law that covers this is s. 690 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

  The Rule in Plain English

  • If a director is non-resident for UK tax purposes, they only pay UK tax on the part of their income linked to UK duties.
  • The UK company must run PAYE on that portion, even if the director is paid overseas.
  • Any relief for overseas work is claimed later — usually through a Double Taxation Agreement (DTA) or Self Assessment.

  What Counts as “UK Duties”?

  This is where many people get tripped up. HMRC’s view is that UK duties aren’t just about being physically in the UK. Because directors are office-holders of a UK company, their responsibilities are tied to the UK. That means even if they work from abroad, they may still be doing UK duties.

  Examples of UK duties (even if done overseas):

  • Joining a UK board meeting by Zoom.
  • Approving UK accounts or annual filings.
  • Making decisions that affect the UK company.
  • Managing UK staff remotely.

  By contrast, if a director is working solely on non-UK operations — such as running a foreign branch or subsidiary — that part of their pay is usually outside the UK tax net.

  Key point: For some director-owners of UK companies, a large share of their responsibilities will still count as UK duties, even when performed abroad.

  How to Apply PAYE in Practice

  • Work out the UK portion: Keep records of board meetings, time spent, and the split between UK vs. non-UK work.
  • Run PAYE on the UK portion: Report it through RTI and pay the tax to HMRC as usual.
  • Claim relief overseas: If the same income is taxed abroad, the director can claim double tax relief under a treaty.

  Example: Director Living in France

  Salary: £60,000 paid by a UK company.

  Time split: 40% UK duties, 60% overseas duties.

  Outcome:

  • £24,000 (40%) → taxed in the UK via PAYE.
  • £36,000 (60%) → not taxed in the UK, but likely taxed in France.
  • PAYE must still be run on the £24,000 and reported to HMRC.

  Risks of Ignoring the Rules

  • Company liability: If PAYE isn’t run, HMRC can recover the tax (plus penalties) from the company.
  • Residency mistakes: Misunderstanding the Statutory Residence Test can cause unexpected bills.
  • Benefits count too: Cars, housing, or other perks linked to UK duties must also be taxed.

  Key Takeaway

  Non-resident directors are not outside UK tax. If they do UK duties — and most do — the company must run PAYE on that portion of pay, even if they live abroad. Double Tax Treaties can reduce overall tax, but the PAYE rules apply first.

  Planning point: Keep good records of what work is UK-related. This protects both the company and the director if HMRC challenges the split.

Disclaimer: The information in this article is for general guidance only for UK director-owners and reflects the 2025/26 tax year at the time of writing (EA £10,500; employer NIC 15%; secondary threshold £5,000; LEL ~£125/week). It does not constitute tax, legal, accounting, or investment advice, and it should not be relied upon as a substitute for tailored professional advice. Eligibility for the Employment Allowance and the deductibility of any salary to a spouse, civil partner, or adult dependant depend on your specific facts, including genuine work performed, commercial rates of pay, contracts, and the statutory exclusions. Worked examples are illustrative only. We do not guarantee HMRC acceptance of any arrangement. Laws, rates, thresholds, and HMRC practice change and this article is not kept up to date automatically. No duty of care is owed and we accept no liability for any loss arising from reliance on this content. Reading this article does not create a client relationship. External links are provided for convenience and are outside our control.

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