Am I self-employed or employed – if I have a limited company?

If you’re new to the world of company formation, you may be confused about your employment status when trading through your own limited company. Am I self-employed or employed? How does this affect the tax and National Insurance I need to pay? These are common questions, but it’s quite straightforward once you get your head around it.

Employment status of company directors and shareholders

When you become a director and shareholder of a limited company, you are both an ‘employee’ and owner of the business by virtue of these two roles. So, even though you are running your own company and essentially working for yourself, you are not actually classed as self-employed for tax purposes.

This is because, unlike the sole trader business structure (in which the person and the business are legally one and the same), a limited company is incorporated as a distinct and independent entity. In the eyes of the law, it exists in its own right and has an entirely separate personality from its director(s) and shareholder(s).

• Directors, shareholders, PSCs, and company secretaries – an overview
• 13 changes to UK company law – from 4 March 2024 
• Most tax-efficient director’s salary and dividends for 2024-25

As a director, you are an officeholder and ‘employee’ for tax purposes, working for and on behalf of the company and its shareholder(s). In exchange for this, the company pays you a salary, which is taxed through Pay As You Earn (PAYE).

As a shareholder, you are a beneficial owner of the company. In exchange for holding shares and investing in the company, you are entitled to a portion of any profit the business makes. You receive this income in the form of dividends.

The tax rates applicable to dividends are more favourable than the Income Tax and National Insurance rates that you will pay on your director’s salary. This is why most owners of small limited companies take a relatively low director’s salary and higher dividends. It is an extremely tax-efficient way to pay yourself through a company.

If you claim Universal Credit or other benefits

The only exception to your status as a company director and shareholder is when claiming Universal Credit and certain other benefits. In such instances, the Department for Work and Pensions may treat you as self-employed, with your company income treated as income from self-employment.

What tax do I pay as a director?

Like most employees, company directors are also paid through payroll, with tax and National Insurance contributions (NIC) deducted through HMRC’s PAYE system.

For tax purposes, your salary is treated as earnings from employment, not earnings from self-employment.

Depending on how much you decide to pay yourself as a salary, you may be liable to Income Tax and Class 1 NIC deductions. Your company may also have to pay Class 1 employer’s National Insurance on your salary.

The company will make these deductions to your salary ‘at source’ (through payroll) each payday and then send whatever personal tax and NIC you owe to HMRC on a monthly basis.

What tax do I pay as a shareholder?

Any money that you receive through dividends is classed as investment income, so it is paid and taxed differently from your director’s salary.

Dividends are paid from business profits. Your company will have already paid Corporation Tax on these profits. Consequently, you do not have to pay Income Tax or National Insurance on dividends.

• Dividend tax – a complete guide
• How to register for Self Assessment
• 2024-25 tax guide for UK business owners

Instead, you are entitled to a £500 annual dividend allowance, which is tax-free. Above that £500, you’ll enjoy lower rates of dividend tax at 8.75%, 33.75%, and 39.35% (2024/25 tax year). The rate(s) you’ll pay will depend on the band of Income Tax you fall into.

Dividends are not taxed at source. It is your responsibility to report and pay tax on dividend income through Self Assessment. You will have to complete a personal tax return each year and pay any additional tax you owe to HMRC.

In summary

Whilst not as clear cut as being a self-employed sole trader, your employment status as a director and shareholder of your own limited company isn’t as complex as it first seems.

The company pays you a director’s salary as an ‘employee’. If the business makes a profit, the company can also pay some or all of those profits to you in the form of shareholder dividends.

The only time you may be treated as self-employed is when claiming Universal Credit or certain other benefits.

The easiest way to get to grips with this is to avoid thinking that you are the company. It’s your business, and you may be the only person working for that business, but you are not self-employed. You are working through the company – and that company is a separate entity with its own legal personality.