NMW and directors

We reviewed a number of national minimum wage (NMW) traps that can catch-out employers in our newsletter on 14 December 2017, but we glossed over the need to consider the NMW for directors’ pay.

Most accountants work on the understanding that a director of his own company does not have to pay himself the NMW. That is the case where the individual is merely paid for his role as an office-holder of the company.

If the director has an employment contract with the company, he or she will also be an employee for NMW purposes, and the NMW should be paid for all hours worked. When a company has grown so it has a number of employees, good practice would be to require everyone in the company to abide by the conditions set out in the employment handbook and to sign a declaration on that basis.

This declaration may well amount to agreement to an employment contract, where the employment handbook refers to employment conditions, rights, responsibilities and duties. As the advice on gov.uk clearly states – an employment contract does not have to be written down.

We are not aware of HMRC actively looking for directors of family companies who have not been paid the NMW. However, if the company comes under scrutiny for NMW issues, the HMRC officers will want to examine the calculation of pay for everyone on the payroll.

Remember the penalty for failing to pay the NMW can be up to £20,000 per employee, and the business will be included on the name and shame list where the total underpayment is £100 or more for the whole payroll.

Written by the Tax Advice Network