There are several ways in which to run your own business.

How to run a business

You may be a sole trader. In this situation you trade as an individual and have a number of clients to whom you sell goods or services. You have sole responsibility for getting the work done and for the business succeeding or failing. You are personally liable for everything, including all debts that you owe as a business.

You may instead, however, be the – or a – director of a limited company. In this situation you set up a company through which to trade. The company is then treated as a legal entity which is separate from you personally. The company can pay you a salary as an employee and, if it makes a profit, you can pay yourself a share of the profits in the form of a dividend on your shareholding.

A company director is not always considered to be an employee, even if you are the sole director of a small company and you run the business all by yourself.

Are company directors employees or not?

The status of “employee” is afforded only to someone who works under an employment contract. On the other hand, a person may be an employee in employment law and yet may have a different status for tax purposes, and vice versa.  Company directors without employment (or service) contracts are not automatically considered to be employees (or workers) for the purposes of employment law regulations.

If you are the sole director of your own limited company then there is generally no advantage in being classed as an employee for employment law purposes, simply because you are unlikely to need to enforce any of your own employment rights against your own company.

As an employee of a limited company you are likely to receive a salary. If so then the limited company will need to register as an employer with HMRC and take Income Tax and National Insurance Contributions (NIC) from your salary under the PAYE system. 

For reasons of tax efficiency many sole directors will pay themselves only a small salary within the Secondary Threshold but then top up their income with dividend payments. You will therefore be treated by HMRC as an employee for tax purposes, even if you are not considered an employee for employment law purposes.

For example, if you take a salary up to £8,840 per year (2021-22 Secondary Threshold for Class 1 National Insurance) then you are not required to pay Income Tax or National Insurance Contributions (NIC) on that income, nor does the company need to make Employers’ NIC.

Is being a company director the same as being self-employed?

No. Sole traders are treated as self-employed but directors of limited companies are not.

When you run a limited company you are not allowed to consider your company’s money as your own as you may do with your business’s money if you are self-employed. Furthermore, you may not transfer your company’s money into your private bank account and you may not declare your company’s money on your personal tax return in the same way you would declare your self-employed earnings. This is because you and your company are legally two separate entities and the money belongs to your company and not to you!

Any salary that you pay yourself is treated as earnings that are paid by an employer, not self-employment. If you receive a dividend payment then this is treated as investment income, which is usually taxed more beneficially than salary since this is not liable for NIC (National Insurance Contributions).

Can you be self-employed and a Director of a Limited Company?

Yes: You can be both a director, for example of your own limited company, and yet also self-employed in a different area of the business.

The difficulty will arise if, in addition to being a director, you then want also to invoice your own company for services rendered by you on a self-employed basis. One is not usually allowed to be both a director of a company and also a self-employed contractor for that same company.  This may sometimes be allowed under special circumstances, but you ought first to seek professional advice about this from a suitably qualified accountant.


Being a company director is not the same as being self-employed, and there are many tax benefits to being a director instead. Whenever you want to register a limited company, we are here to help. We specialise in company formation and can take care of everything related to setting up your business.

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