Director’s Pay Pack – Consolidated FAQs

To set your personal allowance against salary from your own company, the pay must be processed through PAYE. However, the allowance can also be used elsewhere — for example, through another employment where your tax code applies it automatically, or through Self Assessment against other taxable income such as self-employment profits, property income, or dividends. For directors, running PAYE in the company is usually the most effective way to use the allowance, because it not only offsets the salary but also creates corporation tax relief and secures National Insurance credits for your State Pension.

Genuine freelancers don’t trigger PAYE, but check IR35/off‑payroll rules if engagements look like employment.

Whether you need PAYE in your new company depends on what you earned before leaving your previous job and when that employment fell in the tax year. To secure a full State Pension year your gross earnings only need to reach the Lower Earnings Limit, which is £6,500 in 2025/26. If you earned at least this amount in your earlier job, that year is already protected, even if you draw no further salary from your own company. For example, if you earned £30,000 a year, or £2,500 a month, as an employee from April to September 2025, you would have received £15,000 by 30 September. This is well above the LEL, so you would have secured a full NIC credit for 2025/26 even if you paid yourself nothing after starting your company in October.

If your previous job also used up your full £12,570 Personal Allowance, you will not have any allowance left to set against a director’s salary in the same tax year. Even so, running PAYE in your new company may still be worthwhile. Salary remains deductible for corporation tax, an additional employee can allow you to claim the £10,500 Employment Allowance, and having payroll in place ensures you are ready to use allowances and secure pension credits in the next tax year. In short, a sufficiently high salary in earlier employment can lock in your State Pension year, but PAYE in your new company may still help with tax efficiency and forward planning.

Employment depends on the real terms of engagement. PAYE follows status. UK law requires a written statement of particulars from day one

£5,000 Secondary Threshold (employer NIC starts); £6,500 Lower Earnings Limit (NIC credit); £12,570 Personal Allowance / Primary NIC threshold.

£6,500 secures a qualifying State Pension year with no employee NIC. Employer NIC is ~£225 (or nil if EA applies).

35 qualifying years for the full new State Pension; 10–34 years give a proportionate amount; fewer than 10 gives no entitlement.

Dividends avoid National Insurance and benefit from a £500 allowance, but they are paid from after-tax profits and give no deduction for corporation tax or credit towards pensions. A salary, on the other hand, uses the £12,570 Personal Allowance, can secure a qualifying state pension year if set above £6,500, and reduces profits before corporation tax, which is charged at 19% up to £50,000 and at 26.5% in the marginal band. Employer NIC at 15% applies above £5,000, but the £10,500 Employment Allowance may cancel it. For higher earners above £100,000, the tapering of the Personal Allowance makes planning more complex, and pension contributions can play an important role in restoring allowances and improving efficiency. Ultimately the right choice depends not only on tax rates, but also on how much you want to leave in the company and how strongly you wish to build your pension through contributions to schemes such as SIPPs or SSAS.

Dividends avoid National Insurance, but they are paid from post-tax profits, do not reduce corporation tax, do not count as relevant earnings for personal pensions, and do not protect your state pension record. They also reduce the company’s retained earnings, which may be needed for working capital, tax reserves, bank covenant requirements, or future investment. A salary, by contrast, can use your personal allowance, reduce profits before corporation tax, potentially unlock the £10,500 Employment Allowance, and support employer pension contributions that benefit from corporation tax relief. As explained in Q14, the most efficient approach is usually a balance of salary, dividends, and pensions, tailored to profit levels, household tax position, and the company’s need to retain capital.

If your company only has one director on payroll, it cannot claim the Employment Allowance. But employing a spouse or dependant for genuine duties at a commercial rate changes that. Once a second person earns just above the Secondary Threshold (£5,000 per year in 2025/26), the company becomes eligible to claim the full £10,500 Employment Allowance. This can completely offset the employer’s NIC liability, allowing higher director salaries without extra cost. On top of this, paying a spouse can make use of their unused personal allowance, create a qualifying year for their State Pension if the salary is £6,500 or more, and reduce the household tax bill overall. The key is that the work must be real, the pay commercially justifiable, and records kept to evidence it.

A spouse or dependant can take on genuine support tasks such as phone and inbox cover, basic bookkeeping, chasing suppliers or customers, simple Companies House filings, or updating website and social media content. With modern cloud tools, most of this can be done from home. Around 5–10 hours a week at the National Living Wage is usually enough to justify a salary above £5,000 to unlock the Employment Allowance, and £6,500 secures a qualifying State Pension year. The key is that the work must be real and supported by simple records like timesheets.

If the salary paid to a spouse or dependant is not supported by genuine work at a commercial rate, HMRC can disallow the deduction for corporation tax under CTA 2009 s.54. In practice this means the payment may be reclassified, treated like a dividend, and relief denied. While the Employment Allowance might still technically be triggered if a second person is on the payroll, HMRC can challenge the arrangement if there is no evidence of real duties. That could expose the company to backdated tax, interest, and penalties. To avoid this risk, keep job descriptions, timesheets, and simple evidence of the work actually performed.

If a spouse’s salary is not supported by genuine work at a fair rate, HMRC can disallow the deduction for corporation tax and claw back the Employment Allowance. They may also re-attribute the income to the director, increasing personal tax. On top of this, penalties can be charged — up to 30% of the extra tax for careless errors and up to 100% if HMRC believes the arrangement was deliberate and concealed. Interest is added from the original due date, and HMRC can review several past years.

For personal contributions, the maximum you can claim tax relief on is the higher of £60,000 per year or 100% of your relevant UK earnings. For directors, “relevant earnings” means salary or other taxable earned income — dividends do not count. If your salary is low, this limits how much you can contribute personally. You can also carry forward unused allowance for up to three previous tax years, giving a potential total of £240,000 (£60,000 × 4 years) if conditions are met and you were a member of a UK-registered pension scheme throughout.

Employer contributions by your company are not capped by your salary, but they must be “wholly and exclusively” for the business to qualify for corporation tax relief. In practice this means they must be proportionate to the role and the company’s profitability; if contributions are excessive compared with the director’s duties or salary, HMRC could argue they are not genuine business expenses and treat them as distributions instead.

A SIPP (Self-Invested Personal Pension) is an individual pension plan that gives wide investment choice — such as shares, funds, gilts, or commercial property — and is managed for the benefit of one person. A SSAS (Small Self-Administered Scheme) is an occupational pension for directors and key employees of a company. It offers greater flexibility, including the ability to lend up to 50% of its assets back to the sponsoring company on commercial terms, or to invest directly in commercial property. Both SIPPs and SSASs carry strict rules and oversight, but SSASs are often used by small companies that want their pension assets to support the business while still securing tax relief.

Alphabet shares are different classes of ordinary shares, often labelled A, B, C, and so on. They allow a company to pay different dividend amounts to different shareholders, rather than distributing profits strictly in proportion to shareholding. This flexibility is useful in family companies, where dividends can be directed to a spouse or adult dependant to make use of their personal allowance and basic rate tax band, reducing the household tax bill. Each shareholder also gets their own £500 dividend allowance. The shares must be properly authorised in the company’s articles and issued with board approval, and the arrangement must be genuine — HMRC may challenge contrived structures that look artificial.

The numbers in a tax code show how much tax-free income you are entitled to in a year. To work it out, multiply the number by 10. For example, tax code 1257L means you have a personal allowance of £12,570 in 2025/26 before you start paying income tax.

The letter at the end of a tax code explains how the allowance is being applied. L means the standard personal allowance, M means you’ve received part of your spouse’s allowance through the Marriage Allowance, and N means you’ve transferred part of your allowance to your spouse. T signals an adjusted allowance, usually because of untaxed income or restrictions, while K means a negative allowance (you owe tax). An X can show that the code is on an emergency or temporary basis.

A prefix at the start of a tax code shows if the taxpayer is subject to devolved income tax rates. S means you are a Scottish taxpayer and Scottish tax bands apply. C means you are a Welsh taxpayer and Welsh rates apply. These can make a difference even when the numbers look the same.

The codes you are most likely to see are 1257L (standard allowance), 0T (no allowance applied), BR (all taxed at basic rate), D0 (all taxed at higher rate), D1 (all taxed at additional rate), and NT (no tax deducted). Each of these may also appear with S or C prefixes for Scottish or Welsh taxpayers.

If a tax code ends with W1 (week 1) or M1 (month 1), it means HMRC has told the employer to calculate tax on a non-cumulative basis. This usually happens when someone starts a new job before HMRC has issued the correct full-year code. Tax is worked out on that week or month only, without looking back at previous pay.

Some codes are less often seen but still important. K codes show a negative allowance, so extra income must be taxed through PAYE. In Scotland, there are special codes like D2, SD0, SD1, and SD2 that apply different Scottish tax rates. Codes such as 0T W1/M1 are temporary and often used until HMRC confirms the correct code.

HMRC sets and issues tax codes, not the employer. Employers must apply the tax code exactly as shown on a new starter’s P45, or on an updated P6 or P9 notice from HMRC. The employer is not allowed to change the code themselves.

For small company directors and staff, the most common tax codes are 1257L, 1257L W1/M1 (emergency version), BR, SBR, or CBR for second incomes, 0T, and sometimes D0/D1 or NT. These cover most typical cases in a small business payroll.

Directors who only hold office and do not have employment contracts are usually exempt from auto-enrolment. However, if a director also has an employment contract, or if the company employs other staff, then auto-enrolment duties can apply.

An eligible jobholder is someone aged between 22 and State Pension Age, who ordinarily works in the UK, and who earns £10,000 or more per year. These employees must be automatically enrolled into a workplace pension scheme.

Yes, if your spouse is genuinely employed and meets the age and earnings thresholds, you must auto-enrol them into a workplace pension scheme. The only exemption is where the spouse is a director without an employment contract, in which case auto-enrolment does not apply.

The minimum contribution is 8% of qualifying earnings between £6,240 and £50,270. This is usually split as 5% from the employee (including tax relief) and 3% from the employer. Some employers choose to pay more.

Yes. Employees can opt out within one month of being enrolled and receive a refund of contributions. After that, they can stop contributions but amounts already paid in will remain in the pension. Employers must not encourage or pressure staff to opt out.

The Pensions Regulator can issue a fixed penalty of £400 for non-compliance. If the breach continues, daily fines apply, ranging from £50 per day for small employers up to £10,000 per day for the largest.

Yes. Every employer must submit a declaration of compliance to The Pensions Regulator within five months of becoming an employer. This confirms how you have met your duties and is a legal requirement.

Phoenixism is when directors shut down a company with unpaid debts, such as PAYE or NIC, and quickly start a new one carrying on the same business. HMRC views this as abuse and can pursue directors personally using tools like Personal Liability Notices (PLNs), Joint and Several Liability Notices (JSLNs), debt transfer rules, or security deposits.

Security deposits are cash sums that HMRC can require from employers they consider high-risk for non-payment of PAYE or NIC. The deposit acts as protection for future liabilities. If a business continues to employ staff without providing the security when required, it commits a criminal offence.

A company cannot claim the Employment Allowance if the only person earning above the Secondary Threshold is a single director. At least one other employee must also earn above that level, and their role must involve genuine, commercially justifiable work. HMRC may deny or claw back EA claims where second roles are artificial.

OpRA rules apply to most salary sacrifice schemes. Since April 2017, the taxable amount is the higher of the salary given up or the value of the benefit received. This prevents arrangements that swap salary for benefits (like cars or memberships) from being used to reduce PAYE and NIC. Only a few benefits, such as pensions and childcare, remain exempt.

Anti-fragmentation rules stop employers from splitting staff across multiple connected or associated companies to stay under thresholds for NIC or the Employment Allowance. HMRC can aggregate the payrolls of related businesses and apply the limits as if they were a single employer.

In an insolvency, directors who are also employees can claim some protection for unpaid wages. The first £800 of salary is treated as a preferential debt, giving it priority over unsecured creditors. Any unpaid holiday pay is also preferential with no monetary cap. However, amounts above these limits are unsecured and rank behind HMRC’s preferential claims for taxes such as PAYE, NIC, and VAT, meaning recovery may be limited.

Real Time Information (RTI) submissions give HMRC visibility of payroll patterns as they happen. Sudden payroll spikes, missing submissions, or irregular payments can trigger questions or compliance checks. This early warning system helps HMRC spot avoidance schemes or contrived arrangements before a company goes into liquidation or before arrears build up.

HMRC can look back up to six years in most cases, so maintaining good records is essential. Useful evidence includes employment contracts or written particulars, job descriptions, timesheets, payroll and RTI reports, board minutes recording pay decisions, and documents showing the commercial rationale for salaries. These records demonstrate that pay was genuine and justifiable, protecting the company if HMRC challenges past deductions.

Directors+ is designed so directors can protect allowances and pension entitlement without draining cashflow. A salary of £6,500 run through PAYE secures a full State Pension year and gives corporation tax relief, even if the net salary is left in the company as a loan owed to the director. Employer NIC on this amount is only around £225 for the year, and if the Employment Allowance applies it is reduced to nil. This ensures compliance and long-term tax efficiency while keeping cash inside the business.

Yes. Secure electronic payslips are provided each pay period, plus annual P60s.

Yes. Two people included; additional employees can be added for a per‑person fee; larger payrolls move to our bureau service.

RTI (Real Time Information) is the system by which payroll data is submitted to HMRC each time you pay employees or directors. It ensures PAYE, NIC, and other deductions are reported immediately. Missing or late submissions can result in penalties.

HMRC can issue late-filing penalties ranging from £100 to £400 per month depending on the size of your payroll. Interest may also accrue on late PAYE/NIC payments.

Yes. Each employee and director on payroll who is employed at 5 April receives a P60 by 31 May showing their pay and tax/NIC deductions for the year.

A P11D reports taxable benefits in kind (company car, private medical insurance, director’s loans over £10,000, etc.). Employers must file it by 6 July following the tax year and pay Class 1A NIC by 19/22 July.

Yes. Company cars are a taxable benefit. The taxable value depends on the car’s list price and CO₂ emissions. It must be reported on a P11D unless payrolled.

One mobile phone per employee, if provided for business use, is tax-free. Other equipment may be exempt if mainly for business use. Private use can trigger a benefit-in-kind charge.

If your loan from the company exceeds £10,000, it counts as a benefit in kind unless interest is paid at HMRC’s official rate. Also, a s.455 CTA 2010 tax charge applies if the loan remains unpaid nine months after year-end.

Yes, but if they are not wholly business-related, they are treated as taxable benefits or as additional salary. Proper reporting is required through payroll or P11D.

HMRC charges late-payment penalties (up to 4% of the late amount, rising for repeated offences) plus daily interest until cleared.

HMRC can review PAYE, NIC, benefits, expenses, and employment status. They can go back 4 years (6 if careless, 20 if deliberate). Proper records are your defence.

No, not if they only hold office as directors. But if a director has a contract of employment, NMW rules apply. All other employees, including spouses/dependants, must be paid at least the National Minimum/Living Wage.

Employers are required to keep payroll records such as RTI submissions, payslips, contracts, timesheets, expense claims, and evidence of payments for at least three years. In practice, many keep them for six years to align with Corporation Tax and VAT record-keeping. If you are using the Directors+ Pack, our payroll bureau maintains the key records and submissions on your behalf, giving you secure access and reducing your admin burden.

If you discover an overpayment or underpayment within the same tax year, it can usually be corrected in the next payroll run. If it comes to light later, an amended RTI submission must be filed with HMRC. With the Directors+ Pack, we manage these adjustments for you, ensuring compliance and avoiding errors that could otherwise lead to penalties or interest.

Yes. Every individual paid through PAYE, including directors, must receive a payslip showing gross pay, deductions, and net pay. Even if you are the only person on payroll, the payslip is still a legal requirement. With the Directors+ Pack, we generate and deliver electronic payslips to you securely each month, so you remain fully compliant without extra paperwork.

Bonuses for directors are treated as employment income and must be taxed through PAYE in the same way as salary. They are reportable in the payroll period in which they are “made available,” even if the money isn’t physically withdrawn at that time. Our Directors+ Pack ensures that any bonuses are processed correctly through payroll, filed with HMRC, and reflected in your records.

Yes. Employer contributions to a director’s pension are normally deductible for Corporation Tax, provided they are made wholly and exclusively for the business and within the annual allowance rules. These contributions do not need to be linked to salary level if paid by the employer. Through the Directors+ Pack, we ensure contributions are correctly recorded through payroll and provide the paperwork you’ll need to evidence the deduction.

PAYE and NIC must still be reported and paid to HMRC on time. Non-payment can lead to penalties, interest, and, in deliberate cases, personal liability for directors. HMRC may agree a Time to Pay arrangement if you contact them promptly. With the Directors+ Pack, we help you stay on top of deadlines by filing on time and providing clear summaries of what is due so that issues are identified before they escalate.

Yes. HMRC’s Real Time Information (RTI) is shared with the Department for Work and Pensions to determine benefits and pensions, and may also be passed to other government bodies. This makes accurate payroll reporting critical, since mistakes can affect entitlements such as State Pension credits or Universal Credit. With the Directors+ Pack, all RTI submissions are handled by our HMRC-authorised bureau to ensure data is correct and consistent.

Monthly: PAYE/NIC for a tax month must reach HMRC by the 22nd of the following month if paying electronically (19th if by post/cheque). Quarterly: If your average monthly PAYE/NIC liability is under £1,500, you can pay quarterly — due 19th/22nd after the quarter end dates (quarters to 5 July, 5 October, 5 January, 5 April). RTI submissions are still due on or before payday. Interest and penalties apply for late payment.