For many owner-managed businesses, the way directors are paid has evolved over time in response to changing tax rules. What once worked well may now carry unintended consequences – particularly if a company later faces financial difficulty.

In a worst-case scenario, where a business enters an insolvency process, directors may look to the Redundancy Payments Service (RPS) for support. At that point, a key question often arises: is the director treated as an employee?

Brett Barton, Partner in Business Restructuring & Recovery at bk plus, explains the issues directors can face, and why remuneration structure matters more than many realise.

How director pay structures have changed

Historically, running a limited company came with clear financial incentives. Directors often paid themselves a modest salary through PAYE, topped up with dividends. This approach reduced National Insurance and, for a long time, offered a tax-efficient way to extract profits.

That landscape has shifted significantly.

Since 2016, dividend taxation has tightened, with the introduction and subsequent reduction of the dividend allowance. At the same time, corporation tax has risen, reaching 25% from April 2023. For the current tax year, the dividend allowance sits at just £500.

Taken together, these changes have reduced the benefit of the traditional low-salary, high-dividend model – and introduced new risks that are only fully visible when a business is under pressure.

Why this matters if a company becomes insolvent

When a company enters an insolvency process, directors may try to claim certain statutory payments from the RPS. In practice, these claims are often closely scrutinised.

One longstanding challenge is that the RPS does not automatically view directors in the same way as employees. There is often an assumption that directors have greater insight into the company’s financial position and more control over their own income.

More recently, we have also seen claims rejected where a director’s PAYE salary was below the National Minimum Wage (NMW). In these cases, the RPS has questioned whether the individual should be treated as a genuine employee at all, and in some instances this has led to potential NMW breaches being flagged to HMRC.

It’s important to be clear: this reflects our experience of how the RPS has approached certain claims. bk plus is not endorsing this position, nor providing legal opinion on whether it aligns with employment or tax legislation. But it is a pattern directors should be aware of.

What we see working in practice

Where directors have been successful in making claims, there is usually a clear employment framework in place.

That typically includes:

• A formal contract of employment
• PAYE income paid consistently over a number of years
• A salary that is at least in line with the National Minimum Wage, and ideally reflective of the role

Even then, claims are not guaranteed. The RPS considers a wide range of factors, and director claims are often more complex than those of standard employees.

What has become clear, however, is that the historic approach of keeping salary as low as possible and relying heavily on dividends now carries more downside than it once did – particularly given today’s tax environment.

Is it time to review how you’re paid?

Dividends still have a place, but they are not the right solution for every business or every director. Changes in tax, combined with how claims are assessed in insolvency, mean remuneration structures need more thought than they did a decade ago.

If you’re questioning whether your current approach still works – or whether it exposes you to unnecessary risk – our tax team can help you review your options and put a structure in place that suits both your business and your personal position.

And if your business is already under financial strain, or you’re concerned about director loan accounts, drawings, or how the RPS may view your position, our Business Restructuring & Recovery team can provide an initial, practical conversation about next steps.

Clear advice, based on real experience – when it matters most.