If you’re a director of a limited company, it’s important to know whether you’re considered self-employed or employed. This distinction affects your tax obligations, legal responsibilities, and financial planning.

Understanding Limited Companies

First, let’s quickly discuss a limited company. It’s a type of business where the company has its own legal identity, separate from its owners (shareholders) and managers (directors). This separation is often called the ‘corporate veil.’ When you set up a limited company, you’re creating a distinct legal entity. This entity can enter into contracts, own assets, and incur debts in its own right. As a shareholder, your liability is typically limited to the amount you’ve invested in the company.

The Self-Employed vs. Employed Conundrum

Now, let’s address the main question: if you have a limited company, are you considered self-employed or employed?

The short answer is: technically, neither. As the owner and director of a limited company, you’re not considered self-employed in the traditional sense, nor are you employed in the way that a regular employee would be. Instead, you occupy a unique position that combines elements of both.

Your Relationship with the Company

As a director of your limited company, you’re an office holder. This is a specific legal status that’s distinct from both employment and self-employment. You have certain statutory duties and responsibilities towards the company, as outlined in the Companies Act 2006.

However, many directors also work for their company in a capacity that goes beyond their statutory duties. In this case, you may also be considered an employee of the company for tax purposes.

Tax Implications

From a tax perspective, your position is complex:

1. As a director, you’ll need to register for self-assessment and file an annual tax return, much like a self-employed person would. If you’re also a company employee (which is common), you’ll be paid a salary through the PAYE (Pay As You Earn) system, just like any other employee.
2. Any dividends you receive as a shareholder are subject to dividend tax.
3. National Insurance Contributions (NICs): Your NIC situation also reflects this dual status.

• As an employee, you’ll pay Class 1 NICs on your salary through PAYE.
• As a director, you’ll pay Class 1 NICs on your income from the company.

Corporation Tax and Your Limited Company

One key difference between being self-employed and operating through a limited company is corporation tax. Unlike sole traders, who pay income tax on their profits, limited companies are subject to corporation tax on their profits. As of 2024, the main rate of corporation tax is 25% for companies with profits over £250,000. Companies with profits between £50,000 and £250,000 pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate. For companies with profits of £50,000 or less, the small profits rate of 19% applies.

IR35 and Off-Payroll Working Rules

A discussion of employment status for limited company owners would be incomplete without mentioning IR35. These rules, also known as the ‘off-payroll working rules,’ are designed to ensure that individuals working like employees but through their own limited company pay similar taxes to other employees. If your limited company provides services to clients, you need to be aware of IR35. The rules can apply if you are considered an employee of your client if you are contracted directly rather than through your limited company.

If IR35 applies:

• The income from that contract is treated as employment income for tax purposes.
• You’ll need to pay income tax and National Insurance contributions as if you were an employee.

Determining IR35 status can be complex, and getting it wrong can result in significant tax liabilities. This is another area where professional advice from a limited company accountant or IR35 specialist can be invaluable.

Self Assessment and Directors’ Responsibilities

As a director of a limited company, you’re required to register for self-assessment with HMRC and file an annual tax return. This is the case even if all your income is taxed at source (e.g., through PAYE).

Your Self Assessment tax return should include:

• Any salary and dividends received from your company
• Any other income, such as from investments or rental property
• Details of any expenses or allowances you’re claiming

To make this process easier, it’s crucial to keep accurate records throughout the year. Many directors find it helpful to use accounting software to track their income and expenses.

Tax on Dividends: A Key Consideration

One potential tax advantage of operating through a limited company is the ability to pay yourself dividends. Dividends are paid out of the company’s profits after corporation tax has been deducted.

As of the 2024/25 tax year, the tax rates on dividends are:

• 8.75% for basic rate taxpayers
• 33.75% for higher-rate taxpayers
• 39.35% for additional rate taxpayers

There’s also a tax-free dividend allowance, although this has been reduced in recent years and stands at £500 for the 2024/25 tax year.

Many limited company owners choose to pay themselves a small salary up to the National Insurance threshold and then take additional income as dividends. This can be more tax-efficient than taking a larger salary, but the optimal strategy will depend on your circumstances.

Pensions and Benefits

As a director-employee, you can set up a company pension scheme. The company’s contributions are usually tax-deductible expenses, reducing your corporation tax bill. Plus, there’s no National Insurance to pay on pension contributions. However, you won’t automatically be enrolled in a workplace pension scheme like regular employees. It’s up to you to make arrangements for your retirement planning.

Similarly, you need to make your own arrangements for benefits like sick pay and holiday pay. The company can provide these, but they need to be factored into your overall remuneration strategy.

Value Added Tax (VAT)

While not directly related to your employment status, VAT is another important consideration for limited company owners. If your company’s VAT taxable turnover exceeds the threshold (£85,000 as of 2024/25), you must register for VAT. Even if you’re below the threshold, voluntary registration can sometimes be beneficial, particularly if you have many VAT-registered business customers. However, it does add to your administrative burden, so it’s worth discussing with your accountant.

As a limited company owner, you have a unique position that combines roles such as director, employee, and shareholder. This brings both opportunities and responsibilities. It’s important to understand your position, maintain clear records, and seek professional advice when needed. Our limited company accountants can help you stay compliant and maximise your company’s benefits. Embrace your role as a business owner, stay informed, seek professional advice, and maintain good financial practices to focus on running and growing your business.