Are Directors Employees?

Are Directors Employees

Small companies are now required to disclose the number of employees in their year end accounts. But do you include directors in this total? When are directors employees? Incorrect accounts disclosures could incur penalties of £20,000 per worker and £10,000 per day.

Why? Minimum wage regulation and auto-enrolment legislation could apply. So you should ensure your accounts are disclosed correctly.

Directors are office holders

Directors don’t automatically qualify as employees of a company.

They hold an office and are known as office holders.

An office holder can also be an employee if they are ‘employed under contract’ by the company.

Directors on a minimum salary

Most small companies have directors which also own some of the shares.

To optimise their tax position they will typically pay themselves a small salary (£8.4k) topped up with dividends.

See our blog on tax efficient directors salary 2018 for more info.

Directors earning a small salary (£8.4k) can be an employee but this is not always the case.

Are directors employees – tax position

ITEPA/03 states that office holders are treated as employees for tax purposes.

Therefore the tax position is that directors earning a small salary (£8.4k) are employees of the company.

Director’s salaries no matter how small are included on the employment pages of the self assessment tax return.

Are directors employees – disclosure in accounts

The disclosure in the year end accounts is not a tax required disclosure. It is a Companies Act requirement.

Companies Act 2006 (S411) states the number of employees as the ‘number of persons employed under contracts of service’.

A director with a small salary (£8.4k) and dividends will almost certainly not have a contract of service.

No contract of service therefore means not an employee. Therefore the typical director earning £8.4k SHOULD NOT be disclosed as an employee in the accounts.

Contracts of service

Any worker with a contract of service has legal rights. These include the national minimum wage.

The UK national minimum wage from April 2018 for over 25 year olds is £7.83.

A full time director of a small company could easily work 40 hours a week. Under a contract of service they would legally need to receive a minimum of £313 a week. This is over £16k per annum.

That is why directors earning just the small salary of £8.4k are unlikely to have a contract of service. Based on this small salary and the minimum wage they can’t work over 21 hours a week.

Directors with contracts of service

There is no reason why a director can’t have a contract of service. For medium sized or larger companies this would be the norm.

For small companies especially if there are external shareholders it wouldn’t be unusual.

If there is a contract of service then these directors are both office holders and employees. Therefore they should be added to the number of employees in the year end accounts disclosure.

When are directors employees – correct disclosure in the accounts

Directors with contracts of service should be included in the number of employee’s disclosure.

Directors without a contract of service should not be included.

Are directors employees – potential implications for incorrect disclosure


Take a typical limited company run by a husband and wife both who are over 25 years old. They don’t have contracts of service so they don’t have minimum wage requirements. For that reason they therefore pay themselves the optimum directors salary of £8.4k each.

Their accountant however doesn’t know the correct disclosure under the Companies Act. Therefore they state the number of employees as 2.


Stating the number as 2 is informing the authorities that the 2 directors do have contracts of employment.

This means that they have national minimum wage requirements. Assuming they work over 21 hours a week they would be breaking the law. Failing to pay the minimum wage can incur penalties of up to £20,000 per worker.

Assuming the minimum wage would take them over earnings of £10,000 per annum, this would trigger auto-enrolment requirements. Failure to comply with the pension authorities can incur penalties of up to £10,000 per day. See our blog on pension changes 2018

Obviously you could just state that the accounts disclosure is incorrect. And that the correct number of employees should be disclosed as Nil. But confessing to errors in the accounts with HMRC is a route you want to avoid.

HMRC may take the stance that if this is wrong what else is wrong??? Which could trigger HMRC making further investigations.

It is therefore important that you and your accountant ensure the disclosure is correct.

How to check your disclosure is correct

Companies House has a free service which anyone can use to view year end accounts. You don’t need to sign up.

The government website is

Once on the website follow these instructions:

  • Select find company information
  • Select start now
  • Type in any company name
  • From the search results select the company you want
  • Select filing history
  • Find the filter by category options and select accounts
  • Then find the year end accounts required and select view pdf on the right of the screen
  • The accounts will then open in a pdf format
  • Included in the notes to the accounts is the number of employees disclosure
  • It will state ‘the average number of employees during the year was XX’

Remember: if they don’t have a contract of service they are not an employee

If you think that your accountant has done this wrong then why not consider changing accountants? See our why us page on reasons to appoint ourselves.

DISCLAIMER – Please note that the content contained in this article is for general information only and is not a substitute for professional advice – read our full disclaimer

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