Why director payroll is not the same as employee payroll
Directors of limited companies are office holders, not employees in the conventional sense. The PAYE rules apply differently. Directors have an annual earnings period rather than a monthly one, which means NI calculations must account for cumulative pay across the whole year rather than being assessed independently each month. Get this wrong and you can over-deduct or under-deduct NI — both create problems.
Directors also have more flexibility in how they structure remuneration — the salary/dividend split — than employees do. That flexibility is the reason getting the payroll right matters: an incorrectly run director payroll can undermine the tax efficiency of the whole structure.
The optimal salary level in 2026/27
Most director payroll advice centres on paying a salary at or just above the National Insurance lower earnings limit (£6,396 in 2026/27) or at the primary threshold (£12,570). The difference:
- At the LEL (£6,396/yr) — No employee NI, no employer NI, but the year counts as a qualifying year for State Pension purposes. The salary is deductible from company profits.
- At the primary threshold (£12,570/yr) — No employee NI (below the threshold), employer NI applies on the excess above the secondary threshold. The salary is deductible. This level uses the full personal allowance, meaning no income tax on the salary.
The right level depends on your specific situation — other income, whether you have employees (which affects Employment Allowance eligibility), and your company’s profit level. This is a decision to make with your accountant. What matters here is that the payroll is set up to match whatever salary level was agreed.
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Book a Free Check →RTI submissions: what directors must file
Director payroll is subject to the same RTI requirements as any other PAYE payroll. A Full Payment Submission must be sent to HMRC on or before each payment date. If you pay yourself monthly, that is 12 submissions per year. If you pay yourself annually (a legitimate approach some directors take), you still need to submit one FPS for that single payment.
Months where no payment is made require an Employer Payment Summary by the 19th, telling HMRC that no FPS was submitted because no payment was made. Not filing the EPS triggers HMRC to assume you forgot to submit the FPS and issues a penalty.
This is the most common mistake with director-only payrolls: the director pays themselves once a year, files one FPS, and then goes silent for 11 months without filing the monthly EPS. HMRC receives 11 apparent failures to submit and issues 11 default notices.
Dividends: not payroll, but connected
Dividends are paid from company profits after corporation tax, not through payroll. They are not subject to PAYE or NI. They are subject to dividend tax at rates above the annual dividend allowance (£500 in 2026/27).
Dividends must be formally declared by the directors and documented with a dividend voucher. They cannot be paid if the company does not have sufficient distributable reserves. Payments to directors that are not formally declared dividends — informal drawings, unrecorded transfers — are treated as salary by HMRC and subject to PAYE and NI retrospectively.
The payroll element — the salary — must be correct for the dividend element to work as intended. An undeclared or incorrectly calculated salary creates problems that flow through into the dividend tax position.
IR35 and off-payroll working
If you provide services through your limited company to a client, HMRC may argue that you would be an employee if not for the company structure — and that your income should be treated as employment income, with PAYE and NI applied. This is the IR35 off-payroll working rules.
Since April 2021, medium and large private sector clients (and all public sector clients) are responsible for determining IR35 status. If they determine you are inside IR35, they deduct PAYE and NI before paying you. Your company receives the net amount. The salary you pay yourself through the company is then effectively double-taxed unless structured correctly.