Company Directors: Payroll and You
Moving from sole trader to limited company director changes how you pay yourself, how National Insurance is worked out and what you need to tell HMRC. This plain-English guide covers your responsibilities as a director, running payroll for yourself, the two ways to calculate directors' National Insurance with worked examples, 2026 to 2027 tax and National Insurance rates, Employment Allowance, dividends and the records to keep. It is based on HMRC's webinar "Company directors – payroll and you" and HMRC's published guidance, with links to the official sources at the end.
The 5 key points
1. Your company is your employer
Once you become a director of a limited company, you are an employee of that company for PAYE. Tell HMRC you've changed from sole trader to company director, register the company as an employer and run payroll for yourself, even if you are the only person paid.
2. Directors' National Insurance is worked out differently
Directors use an annual earnings period. You choose either the standard annual (cumulative) method or the alternative method, set it in your payroll software and report it on your Full Payment Submission (FPS).
3. Income Tax is the same as for any employee
PAYE Income Tax works exactly as it does for your other staff, using your tax code. Scottish and Welsh taxpayers have their own codes, and Scotland has its own rates and bands.
4. Some rules for employees don't apply to sole directors
Directors without an employment contract aren't covered by the National Minimum Wage, and a company whose only employee paying employer National Insurance is a single director can't claim Employment Allowance.
5. Keep company and personal money apart
Dividends, salary, expenses and director's loans are taxed differently. Keep accurate, separate records for 6 years from the end of the company's financial year, and track anything you borrow from or lend to the company.
Your responsibilities as a director
HMRC's example is Max, who was employed, then self-employed, and now runs his business as a limited company. As a sole trader he dealt with his own tax through Self Assessment. As a director, the company is a separate legal person with its own responsibilities, and Max is paid by it.
Using an accountant or agent
An accountant, tax adviser or agent can deal with HMRC on your company's behalf, including running payroll.
HMRC will only talk to them once you've authorised them. Even with help, you stay legally responsible for the company's records, accounts and returns.
Directors and PAYE
There are three parts to getting this right: setting up payroll, working out National Insurance and Income Tax, and making your payments and submissions to HMRC on time.
How HMRC's poll answered
Asked what they use to run payroll, 69% of webinar attendees said a software package, 19% an accountant or agent and 11% HMRC's Basic PAYE Tools.
Calculating directors' National Insurance
Directors pay National Insurance contributions (NICs) on their earnings like other employees, and the company pays employer NICs on top. The difference is the earnings period. You choose one of two methods in your payroll software.
Each time you're paid, work out the NICs due on your total earnings for the tax year to date above the annual thresholds, then take off the NICs already paid this year.
Each week or month, work out NICs on that period's earnings above the weekly or monthly thresholds. At the end of the year, reassess using the total annual earnings and annual thresholds, and collect any shortfall from the last payment.
Class 1 thresholds and rates from 6 April 2026
Worked example: the annual method
Max pays himself a salary of £3,000 a month in 2026 to 2027. Under the annual method, no NICs are due until his earnings for the year so far pass the annual thresholds.
Check the figures with HMRC's calculator
HMRC's director's National Insurance calculator asks for the category letter, the date the director was appointed, total pay to date and the NICs already paid by the director and employer. At £33,000 of pay to date, it shows £4,200 of employer NICs and £1,634.40 of employee NICs. After the next £3,000, the totals rise to £4,650 and £1,874.40, so £450 and £240 are due for that month: £690 in all.
Worked example: the alternative method
On the same £3,000 a month, NICs are worked out every month using the monthly thresholds, then checked against the annual figures at the end of the year.
Which method suits you?
Suits irregular pay, such as a large one-off bonus. Total NICs for Max: £6,524.40, with nothing deducted from his pay for the first 4 months.
Suits regular pay. Total NICs for Max: £6,523.32, with a steady amount paid each month, which is easier for cash flow.
What you should do
Choose a method, set it against the director in your payroll software, and it will be reported on your Full Payment Submission (FPS). Whichever you use, the total for the year comes out almost the same.
PAYE Income Tax
For Income Tax, treat a director like any other employee. Most people have the £12,570 Personal Allowance and the tax code 1257L, though HMRC may issue an individual code. If you have a P45 from a previous job, use it to set your tax code. If you don't, use HMRC's starter checklist.
Income Tax rates for 2026 to 2027: England, Wales and Northern Ireland
Scottish rates of Income Tax for 2026 to 2027
Payments and submissions
Send a Full Payment Submission (FPS) on or before each payday. If you don't pay yourself in a tax month, no FPS is due, but you must tell HMRC with an Employer Payment Summary (EPS) instead.
Paying yourself once a year
If you only pay yourself once a year, contact HMRC's payment enquiry helpline to register the PAYE scheme as an annual scheme.
You then send a single FPS each year, on or before the payday, and don't need to send an EPS for the months you pay nothing.
Minimum wage and directors
Company directors aren't entitled to the National Minimum Wage or National Living Wage unless they have a contract of employment with the company. Any other staff you employ are, at these rates from 1 April 2026.
Employment Allowance
Employment Allowance reduces your employer Class 1 NICs bill. From 6 April 2026 you can claim up to £10,500 a year, and if you were eligible in 2025 to 2026 and nothing has changed, you still are.
Businesses and charities with employees, as long as at least one employee other than a sole director is paid above the Secondary Threshold.
A company with only one director who is also the only employee liable for employer NICs, a public body, a public authority that isn't a charity, or a business whose work is wholly or mainly public functions.
Expenses and benefits
Directors often receive expenses and benefits from their company. In HMRC's poll, 66% of companies paid directors' travel expenses, 63% mileage allowances, 41% phone costs and 27% internet costs. Expenses repay costs of doing the job. Benefits are a reward or incentive, such as a company car or private medical cover, and may be taxable and reportable.
Dividends
Dividends are paid to shareholders out of the company's profits, and the company must meet certain conditions before it can pay them. They aren't earnings, so no NICs are due on them.
Above the £500 dividend allowance: 10.75% basic rate, 35.75% higher rate and 39.35% additional rate. Report dividends on your Self Assessment tax return.
Student loans and off-payroll working
If you have a student or postgraduate loan, repayments are taken through payroll in the same way as for other employees. If your company provides your services to clients through an intermediary arrangement, check whether the off-payroll working rules (IR35) apply.
Keeping records
Accurate records help you plan your finances and get your Companies House filings, HMRC returns and Corporation Tax right. Keep company spending separate from personal spending, and split anything used partly for business and partly personally.
Keep them for 6 years from the end of the company financial year they relate to, on paper or electronically. HMRC may check them.
Keep them for at least 6 years if they were created on or after 1 April 2021, or still had to be kept on 31 March 2021 under the old 3-year rule.
Director's loan accounts
By law you must keep a record of any money you borrow from, or pay into, your company that isn't salary, dividends or expense repayments. This is usually called a director's loan account, and the balance appears in your annual accounts.
How to avoid penalties
Official guidance
- Running a limited company: your responsibilities
- National Insurance for company directors
- Work out a director's National Insurance contributions (calculator)
- Register as an employer
- Basic PAYE Tools
- Employment Allowance: further employer guidance
- Tax on dividends
- Fact sheet: Director's loan accounts
- HMRC email updates, videos and webinars for employing people
- Our guide: Getting payroll information right
- Our guide: National Minimum Wage
Setting up payroll for your new company, or not sure which National Insurance method suits you? We help directors across Paisley and Renfrewshire pay themselves tax-efficiently and keep their PAYE, dividends and director's loan account in order.
Talk to us about director payrollThis guide is general information based on HMRC's published guidance and webinar, and is not advice for your specific circumstances. Rules change, so check the official guidance or speak to us before acting.