Is a director an employee of a company?
Posted on 29th April 2021 at 10:47
A director of a company is categorised officially as an officeholder and does not automatically qualify as an employee. If an individual is the only director of a limited company and manages the business himself, they may not qualify as an employee.
As per the Employment Rights Act 1996, Section 230 an employee is an individual that works under or has entered an employment contract. As a norm, directors do not sign any employment contract although they may have a service contract. This is practically the same and offers an individual employment status.
Those serving as company directors that do not sign a service contract do not fall under the purview of employees as per employment law regulations. The situation where directors can be considered as employees is when and if they qualify for the majority of employment status standard that determines if one works for a company as an employee.
A director that does not draw a salary (instead takes dividends as a shareholder) are unlikely to be classed as employees vis-à-vis directors on the company payroll. Despite that, if they do not sign a service contract and are just being paid a salary this will not give them employee status as per employment law rules.
Directors to reduce their tax payments choose to take a salary along with dividends. As per law, a director that draws nothing extra over an annual salary of £8,788 does not have to contribute towards National Insurance or Income Tax on their salary. Consequently, for tax reasons, several sole directors opt for a salary within the minimum limit in addition to drawing dividends to prop up their income.
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