Table of Contents
A director is someone who manages the day-to-day aspects of running of a limited company, which includes all operational, financial, and statutory administrative duties. Along with company secretaries, limited company directors are referred to as company ‘officers.
Directors are appointed by the shareholders or guarantors (members) who own the company. In many cases, particularly small companies, members appoint themselves as directors, thus taking full responsibility for running their own companies.
Private limited companies in the UK are required by law to have a minimum of one human (‘natural’) director appointed at all times. Corporate bodies may also be appointed as directors, provided there is at least one natural director in place. However, public limited companies (PLCs) must have at least two appointed directors at all times.
There is no maximum number of natural or corporate directors that companies may have, unless the articles of association imposes any such restrictions.
Responsibilities of limited company directors
Directors are responsible for running a business on behalf of its members and in accordance with the Companies Act 2006, the articles of association, and any service contract that may be in place. Some companies also have shareholders’ agreements that further clarify the role and obligations of directors.
In addition to their statutory and contractual responsibilities to the company, directors have a fiduciary duty to members. They are expected to act honestly, in good faith, and in the best interests of the company and its members. They should not make decisions for personal gain, nor should they engage in illegal activity or unethical behaviour.
Fiduciary duties of limited company directors
Fiduciary duties have developed over time from general common law duties. Although they are somewhat general in nature and open to interpretation on a case-by-case basis, the statement of general duties in the Companies Act 2006 (sections 170-177) sets out the way in which limited company directors must act and account for their actions. They are as follows:
- To act within their powers
- To act in good faith to promote the success of the business
- To exercise independent judgment
- To exercise reasonable care, skill and diligence
- To avoid or declare any conflicts of interest
- Not to accept benefits from third parties or use their position to make private profits
- To declare any personal interest in a proposed transaction or arrangement with the company prior to it entering into such a transaction
Limited company directors can be removed at any time if they are found to be in breach of their legal, contractual, or fiduciary responsibilities and duties. The Court may also remove and disqualify a director if he or she is deemed unfit to carry out the role. Failure to adhere to the required responsibilities can lead to personal prosecution.
Statutory responsibilities of limited company directors
Directors are legally responsible for fulfilling a company’s statutory filing and reporting requirements. Some directors appoint company secretaries and/or accountants to carry out some of these tasks, which include:
1. Registering the company for tax
Companies must be registered with HMRC for Corporation Tax no later than 3 months after carrying on any type of business activity. They may also have to register for VAT and Pay As You Earn (PAYE). Non-trading (dormant) companies do not have any tax liability whilst they remain inactive.
2. Filing confirmation statements
An annual confirmation statement must be completed at least once every 12 months and submitted to Companies House (the UK Registrar of Companies) online or by post. This document is used to confirm and/or update important company data.
The confirmation statement, which replaced the annual return form on 30th June 2016, enables Companies House to ensure that all of the key company details held on its database and displayed on the central public register are accurate and up to date.
3. Preparing annual accounts
Annual accounts provide information about trading activity and finances. They should be prepared for shareholders and Companies House at the end of every financial year, which is usually a 12-month period.
Small companies can submit abbreviated accounts. All companies, regardless of size, must prepare full ‘statutory’ accounts for HMRC when they submit their annual Company Tax Return.
4. Preparing Company Tax Returns
A Company Tax Return must be submitted to HMRC online at the end of each Corporation Tax accounting period, which is usually 12 months long. Full statutory accounts must be included.
The tax return and account are used to work out how much Corporation Tax a company owes. The filing deadline is 12 months after the end of each accounting period.
5. Paying Corporation Tax
Companies must pay Corporation Tax on all taxable profit. This tax applies to all taxable income generated within an accounting period, which is usually 12 months long. Any tax due must be paid to HMRC 9 months and 1 day after the end of each accounting period.
6. Reporting changes
Limited company directors must notify Companies House of any changes to the following information:
- directors’ details
- appointment or removal of a director
- details of company secretaries
- appointment or removal of a company secretary
- registered office or Single Alternative Inspection Location (SAIL address)
- company name
- accounting reference date (ARD)
- share capital
- shareholders’ details (reported in the annual return).
- register of People with Significant Control (PSC register)
- nature of trading activities (SIC codes)
When these changes are reported, the public register is updated accordingly. This usually takes place within 24 hours,
7. Keeping company records and registers
Directors must keep a number of business and accounting records at the company’s registered office or SAIL address. These include:
- registers of members
- register of directors
- register of directors’ residential addresses
- register of company secretaries
- register of people with significant control (‘PSC’ register )
- minutes of meetings
- company resolutions
- records of all sales, purchases, credits, and liabilities
- bank statements
- company formation documents
- share certificates
The statutory registers must be made available for public inspection at either the registered office or SAIL address. Moreover, directors are responsible for notifying Companies House of the location of these important registers.
8. Maintaining company addresses, stationery and signage
Companies must maintain a registered office in their country of incorporation at all times. This address is displayed on public record. A registered office is used by Companies House, HMRC and other government bodies as the official correspondence address where statutory mail and notices are delivered.
If a SAIL address is used, Companies House must be told immediately and notified of the records held at that location. They must also be notified if any of there records move from the SAIL address to the registered office, and vice versa, and if there are any changes to either address.
The company’s full name must be displayed on a sign at the registered office and all trading locations. However, this rule does not apply to any address that is primarily used as a private residence.
The full company name must be stated on all forms of official business stationery, including websites and emails. Letters, order forms and websites must also show the company’s registered number, registered office address and country of incorporation.
Failure to adhere to statutory duties and responsibilities
Limited company directors can be removed from office at any time if they are found to be in breach of their legal, contractual, or fiduciary responsibilities and duties. The Court may also remove and disqualify a director for ‘unfit’ conduct.
Failure to adhere to the required responsibilities can lead to personal prosecution. Companies can also face penalties for late filing of statutory accounts and tax returns. In more severe cases, companies can be dissolved and struck off the register.
Types of decisions made by limited company directors
Typically, directors have the power to make the following decisions on behalf of the company and its members:
- employing staff
- appointing a company secretary
- transferring shares
- changing the registered office address
- setting up and using a SAIL address
- setting up a business address
- reviewing contracts with suppliers, manufacturers and service providers
- marketing, promotional and communication strategies
- appointing an accountant or solicitor
- setting up a business bank account
- voluntary VAT registration
- growth strategies
- expanding the business geographically
- improving the financial position of the company by any reasonable means
- entering into contracts
- appointing an insolvency practitioner if the business is facing financial difficulty
- calling board meetings and arranging minutes of meetings
Some of these duties may be delegated to a company secretary, if one is appointed.
Some companies grant additional powers to their directors. It’s entirely up to the shareholders or guarantors, but the rights and powers of directors should be clearly stated in the articles of association. Members only make decisions in exceptional circumstances that extend beyond the scope of the directors’ powers.
What tax does a company director pay?
Limited company directors are classed as ’employees’ of a company for tax purposes. Therefore, they receive their salary payments through PAYE.
When a directors is also a shareholder, they will have to register for Self Assessment to report additional income (e.g. dividends) and pay the required personal tax and National Insurance contributions (NIC) on earnings that have not been taxed through PAYE.
Director who is also a shareholder
A director who is also a shareholder will usually take a regular salary, with the remainder of their income issued as dividends. These dividends are paid from company profits after the deduction of Corporation Tax.
No Income Tax is payable by a company director if their total annual income (salary, dividends, and any other form of income) is below £50,270. This includes the £12,570 tax-free Personal Allowance (2023/24 tax year).
Minimising personal tax liability
The flexible structure of a limited company also allows directors to reduce their Income Tax and NIC liabilities if they are also shareholders. This is one of the significant benefits of running a business as a limited company, rather than using the sole trader structure.
Since a company can be owned and managed by just one person, you can register for Self Assessment and receive shareholder dividends on top of your director’s salary. This strategy often results in tax savings for the company and the individual – particularly when the director’s salary is kept below the Class 1 NIC primary threshold, with the remaining income taken as dividends.
No Income Tax or Class 1 National Insurance is due on salary income below the NIC primary threshold, which is £12,570 for the 2023/24 tax year.
Dividends up to £1,000 in a single tax year are tax-free. Above this amount, dividends are liable to dividend tax, but not Income Tax or NIC. This is beneficial because dividend tax rates are lower than Income Tax rates.
Registering for Self Assessment
Limited company directors can register for Self Assessment with HMRC online and complete a tax return every year to report additional income that is not received through PAYE. Income from all sources (including capital gains), whether received from the company or elsewhere, must be declared in this tax return.
The most popular and convenient option is to file an online return. It must be submitted to HMRC before midnight on 31st January following the end of the tax year. The deadline for filing a paper return 31st October. All tax and National Insurance must be paid by 31st January.