Non-executive directors: role, duties and pay explained

As a company grows, the founders often want someone on the board who can see the business from the outside. That is the job of a non-executive director, often shortened to NED.

Executive and non-executive directors

UK company law does not formally divide directors into "executive" and "non-executive". The difference is practical:

• An executive director works in the business, often as an employee, for example as managing director or finance director.
• A non-executive director is not part of the management team. They attend board meetings, review performance and strategy, and challenge decisions.

Both are registered at Companies House in exactly the same way, and both carry the same legal duties.

What a NED does

A good NED brings experience, contacts and independence. Typical responsibilities include:

• challenging and testing the strategy proposed by the executives;
• monitoring financial performance and risk;
• advising on growth, funding and governance;
• helping with senior appointments and pay decisions;
• in larger companies, sitting on committees such as audit or remuneration.

In a small or growing company a NED may also act as a mentor to the founders or represent an investor on the board.

Legal duties of a NED

A NED is a director under the Companies Act 2006, so all seven general directors' duties apply. This includes promoting the success of the company, using independent judgement, using reasonable care and skill, and avoiding conflicts of interest. A NED cannot avoid responsibility by saying they were "only non-executive". They are expected to ask questions, read board papers and raise concerns.

Like any new director, a NED must verify their identity with Companies House before their appointment is filed, and the appointment must be notified within 14 days. See our guide on how to appoint a new director.

How NEDs are paid

There is no fixed or legal rate for NED pay. In practice:

• Most NEDs receive a fixed annual fee, agreed in a letter of appointment, rather than a salary linked to performance.
• The fee reflects the size and complexity of the company, the number of days a year expected and any committee work.
• In small and early-stage companies, NEDs are sometimes paid partly or wholly in shares or share options. Some act unpaid, for example in charities and not-for-profit companies.
• Reasonable travel and other expenses are usually reimbursed.

Because rates vary so widely, the best approach is to agree the expected time commitment first, then agree a fee that fits it. Be wary of any figure presented as a "standard" NED salary.

How NED fees are taxed

HMRC generally treats a director's fees as earnings from an office, so they usually go through the company's payroll with Income Tax and National Insurance deducted, even if the NED is self-employed in other work. The rules can be complex, especially for NEDs who live abroad or who want to invoice through their own company, so the company and the NED should take advice from an accountant.

Appointing a NED: practical steps

1. Agree the role, time commitment, fee and length of appointment.
2. Put it in a letter of appointment.
3. Check the articles and approve the appointment by board or shareholder resolution.
4. Make sure the NED has verified their identity and has a personal code.
5. File the appointment with Companies House within 14 days and update your registers.
6. Consider directors' and officers' (D&O) insurance.

How Form My Company can help

We file NED appointments and resignations through our Director Appointment or Resignation service for £100. As a Companies House ACSP, we can verify your NED's identity remotely and give them their personal code. We can also prepare the board resolution through our Resolutions and Minutes service. If your NED prefers not to show their home address, our Director Service Address costs £250 a year.

Frequently asked questions