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Do I need an employment contract with my limited company?

Posted on: Wednesday 19th August, 2020

Do I need an employment contract with my limited company?

Although it’s not essential for directors to work under a contract of employment, doing so can offer advantages in certain circumstances. There are tax and other financial implications when you’re an employee as well as a director, so what might be the main advantage of establishing a written contract of employment?

Eligibility for director redundancy on company liquidation

One potential benefit is that directors who also have employee status may be eligible to claim redundancy should their company be liquidated. Under these conditions you would need to prove your status as an employee by completing a questionnaire from the Insolvency Service.

Questions would include whether or not an employment contract is in place, the number of hours you work each week, and the length of time your business has been incorporated. A genuine contractual relationship with your company doesn’t necessarily require a contract to be written, however.

An oral or implied contract may suffice, although depending on other factors, this might make it a little more difficult to prove beyond doubt that you’re an employee.

Employment contracts and the National Minimum Wage (NMW)

If you’re not an employee, but purely hold office as a director, you’re exempt from receiving the National Minimum Wage. This could be an important point when deciding on the level of remuneration you take as salary under PAYE, and how much is taken as dividends each year.

CFS Redundancy Payments are a very professional company, Caroline who is dealing with our case is friendly, compassionate and very clear in explaining everything during this difficult time. The service we have received has been amazing, Thank you.
Tina Hill
Tina Hill

Under the PAYE scheme you pay tax and National Insurance on your employment income – liabilities which could, in some cases, increase if you’re forced to take the National Minimum Wage because you have an employment contract.

The National Insurance threshold is typically used as a basis for calculating the most tax-efficient proportion to take as salary, with dividends making up the remainder of a director’s remuneration and attracting less tax.

Other factors which might influence your decision to put an employment contract in place include potential eligibility for sickness pay as an employee. Other statutory entitlements should the company need to be liquidated include arrears of salary and holiday pay.

Director Redundancy Calculator

CFS Redundancy Payments can provide more detailed information on the merits and potential drawbacks of establishing a contract of employment as a director, taking into account your own personal circumstances. Call today to arrange a same-day meeting free-of-charge. CFS are Authorised and Regulated by the Financial Conduct Authority. Authorisation No 830857. You can check our registration here.

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