Directors’ remuneration - avoiding HMRC penalties

Employees’ pay

As an employer you must send a report with details of pay, tax and NI to HMRC whenever you pay one or more employees cash earnings, e.g. salary or bonus. If you don’t send your payroll report on time more than once in a tax year HMRC will fine you. For employees a report is required when you actually pay them or, if earlier, when they are entitled to a payment. Things are less straightforward for directors’ pay.

Directors’ pay

An anti-avoidance rule applies to prevent companies from delaying PAYE and obtaining a corporation tax deduction for directors’ earnings. The rule says that a director is treated as having been paid on the earliest of:

1. The date when earnings are “credited” in the company’s accounts or records whether or not there is any restriction placed on the director from drawing the money, or
2. If the amount of pay is determined before the end of the company’s accounting period to which they relate, the date that period ends, but
3. If the amount of the earnings is decided after the end of the company’s accounting period to which they relate, when the amount is determined.

Example - credited in the company’s records.Acom Ltd’s financial year ends on 31 December. Without any formal resolution to set the director’s rate of pay it pays each director £6,000 per month. This is noted in the company’s accounting records on the last working day of each month. In this instance the remuneration is treated as paid and received on that day.

Example - decided during the financial period. In a board meeting on 31 October 2024 Acom’s directors pass a resolution to pay themselves a bonus for the year ended 31 December 2024 to be payrolled on 31 January 2025. The payroll manager credits the director’s loan account on 27 January 2025. Rule 1 above doesn’t apply but Rule 2 does as the bonus was approved in the financial period to which it relates. It therefore counts as paid on 31 December 2024. A PAYE report should be sent to HMRC that day. Contrary to what you might have heard, the passing of the resolution isn’t caught by Rule 1. The passing of a resolution or any other form of approval of a director’s pay doesn’t count as being “credited” in the company’s records.

Example - decided after the financial period. The facts are the same as for the previous example except that the directors only pass the resolution about the bonus on 21 May 2025 when they approve the company’s accounts for the year to 31 December 2024. The bonus counts as paid on 21 May 2025 and so the company’s payroll manager must send a corresponding payroll report to HMRC at that time.Even though the bonus was paid after the end of the accounting period, as long as the liability to pay it was accrued before that time, Acom can claim a corporation tax deduction for it in its accounts to 31 December 2024.