At Vectigalis Tax, we recently assisted two clients who had just launched a UK-based technology business. Both were appointed directors from incorporation. One of them took on operational responsibilities with a formal service contract; the other acted purely in a strategic, non-executive capacity.

A few months into the company’s first year, the question arose: Are both directors entitled to the national minimum wage (NMW)?

The answer lies in HMRC’s internal guidance, specifically section NMWM05140 of the National Minimum Wage Manual: “Entitlement to national minimum wage: directors and office holders.”

The legal distinction: office holders vs workers

Not all directors are automatically workers for NMW purposes. As HMRC explains directors without contracts of employment are office holders. They are not entitled to the national minimum wage for performing their duties as directors. 

Where a director receives payments solely for holding office (i.e. as remuneration approved by the board or shareholders), those payments fall outside the scope of minimum wage legislation.

This applied to one of our clients: there was no employment contract, no fixed hours, and no supervisory relationship. Their role was limited to strategic oversight and board-level input. HMRC would regard this as a classic office holder arrangement.

When directors are workers

The second client had a formal employment contract, clearly outlining hours, responsibilities and salary. They managed staff and were directly involved in day-to-day operations. In that case, the director was performing duties under a contract of employment, and therefore was a worker under section 54(3) of the National Minimum Wage Act 1998. As a result, the NMW rules applied.

Where a director wears both hats—acting as a statutory office holder and as a worker under a separate contract—it’s important to distinguish the nature of each role and the related payments. Only the worker component is covered by NMW regulations.

Common errors we encounter

1. Assuming all directors are exempt.
Many founders sign service agreements or work full-time in the business. This may establish a contract of employment, triggering NMW rights.

2. Combining all payments under “director’s fees”.
Even where a person is paid as a director, if they are also subject to regular hours, tasks, and line management, HMRC may reclassify the role as employment.

3. Overlooking dual status.
A director who occasionally provides operational services under a consultancy agreement may be a worker for that engagement, and the company must comply with NMW rules accordingly.

Practical steps for compliance

• Identify the legal basis of the role. Is the director performing work under a contract or simply fulfilling office-holder duties?
• Document everything. If director remuneration is authorised by resolution and not linked to a contract of service, this should be clear from board minutes or shareholder approval.
• Review agreements annually. Changes in responsibilities or the introduction of service contracts may change the director’s employment status over time.
• Keep payroll codes distinct. Use separate classifications for payments made under an employment contract and those made for holding office.

In many start-ups and closely held companies, directors begin with informal roles. But as businesses grow and responsibilities formalise, so too does the legal nature of a director’s relationship with the company. 

Understanding whether a director is an office holder, a worker, or both, is essential to ensuring compliance with NMW legislation and avoiding HMRC scrutiny.

For tailored advice on employment status, director remuneration and national minimum wage compliance, contact angelo@vectigalistax.co.uk.

This article is provided for general information only and does not constitute professional advice. For guidance specific to your circumstances, please speak to a qualified advisor.