For many charity leaders, pay is an uncomfortable topic.
You didn’t start a charity to make money.
You didn’t become a trustee to extract value.
And yet, as soon as a charity grows — employs staff, manages grants, delivers services — the question of director pay becomes unavoidable.
Handled properly, pay is legitimate, transparent, and compliant.
Handled badly, it can undermine trust, breach charity law, and expose trustees personally.
This is the line every charitable company must walk.
What This Guide Covers
- When directors can be paid
- Why salary vs dividends is fundamentally different in charities
- The governance mistakes we see most often
- How trustees protect both the charity and themselves
First: A Crucial Distinction — What Type of Charity Are You?
Before discussing salary or dividends, structure matters.
Most charitable companies fall into one of two categories:
1. Charity Limited by Guarantee
The most common structure:
- No shareholders
- No dividend entitlement
- Trustees act as directors
- Profits must be reinvested into the charitable purpose
👉 Dividends are not allowed. Full stop.
2. Charity with a Trading Subsidiary
Some charities operate a separate trading company:
- The charity owns the shares
- The trading company generates profits
- Profits are gift-aided back to the charity
In this structure:
- Directors of the trading company may be paid
- Dividends flow to the charity — not individuals
Understanding which entity you are operating in is critical.
Why Director Pay in Charities Is So Sensitive
In a commercial business, director pay is primarily a tax decision.
In a charity, it becomes:
- A governance decision
- A public trust issue
- A regulatory risk area
Charities must demonstrate:
- Reasonableness
- Transparency
- Independence
- Clear benefit to the charity
The bar is higher — because the mission is public, not private.
Salary in a Charitable Company: When Is It Allowed?
Yes — directors or trustees can be paid salaries in certain circumstances.
But strict conditions apply.
Payment is allowed only if:
- It is permitted by the governing document
- The role is necessary and clearly defined
- Pay is reasonable and benchmarked
- Conflicts of interest are declared and managed
- The decision is formally approved and documented
This typically applies where:
- A founder becomes a paid CEO
- A trustee takes on an executive role
- The charity relies on specialist expertise
What Regulators Expect
Regulators such as the Charity Commission for England and Wales will expect evidence that:
- The service could not reasonably be provided unpaid
- The individual did not set their own pay
- Independent trustees approved the arrangement
Without this, scrutiny increases quickly.
Common Salary Mistakes
1. Informal Payments
“We just started paying them.”
No approval. No benchmarking. No documentation.
2. Founder Syndrome
A founder pays themselves because they built the organisation.
Understandable — but not compliant.
3. Payroll Issues
Some charities:
- Pay irregular amounts
- Treat salary like drawings
- Miss RTI submissions to HM Revenue & Customs
This creates risk across tax, governance, and funding.
Dividends: Why They’re a Red Flag
Charities cannot pay dividends to individuals
Dividends represent:
- A return on ownership
- A private benefit
Charities exist to avoid private benefit.
If dividends are being paid to individuals, it usually indicates:
- A structural misunderstanding
- A governance breach
- A regulatory risk
“But Our Accountant Mentioned Dividends…”
This often happens when:
- A charity is treated like a standard limited company
- Trading subsidiaries are misunderstood
- Commercial advice is applied incorrectly
Charity accounting requires specialist understanding.
Trading Subsidiaries — Where Complexity Arises
A trading subsidiary:
- Is a standard limited company
- Protects the charity from trading risk
- Transfers profits via Gift Aid
Director Pay in the Subsidiary
- Salaries are allowed
- Dividends go to the charity, not individuals
But:
- Pricing must be fair
- Roles must be clear
- Conflicts must be managed
Done properly, this structure works well.
Done poorly, it creates risk in both entities.
Tax Isn’t the Main Issue — Governance Is
In business, salary vs dividends is about:
- Tax efficiency
- National Insurance
- Income extraction
In charities, the real questions are:
- Is the payment justified?
- Is it documented?
- Would it withstand public scrutiny?
A useful test:
If this decision appeared on your website, could you justify it clearly?
Trustee Risk: What’s at Stake
If pay decisions are:
- Improper
- Undocumented
- Excessive
Trustees may:
- Become personally liable
- Be required to repay funds
- Face disqualification in serious cases
Good intentions are not enough.
Good governance is essential.
What Good Looks Like
Well-run charities implement:
✔ Clear Structure
- Defined charity entity
- Trading subsidiary understood
✔ Transparent Pay Policy
- Written remuneration policy
- Market benchmarking
- Annual review
✔ Proper Governance
- Conflicts declared
- Decisions minuted
- Independent approval
✔ Accurate Reporting
- Payroll properly operated
- Filings up to date with HM Revenue & Customs
- No unexplained payments
This is not bureaucracy — it is protection.
A Short Case Example
A charity founder worked unpaid for years.
As funding increased, they began taking irregular payments:
- No contract
- No payroll
- No trustee approval
A funder requested governance documentation.
The outcome:
- Payments had to be repaid
- Trustees rushed to reconstruct records
- Trust was damaged
The charity survived — but at a cost.
Why This Happens
Most charity leaders:
- Are mission-driven
- Rely on volunteers
- Inherit evolving structures
Non-specialist accountants often:
- Apply commercial logic
- Miss governance requirements
- Focus on compliance, not risk
Charities need more than basic compliance.
Final Thought
Pay isn’t the problem.
Lack of clarity is.
When structure and governance are right:
- Trustees are protected
- Funders are reassured
- Leaders are fairly rewarded
- The mission remains central
About Hammond & Co
At Hammond & Co, we support charities with clear, practical guidance that goes beyond compliance — helping trustees make confident, well-governed decisions.
Because good accounting doesn’t just report figures.
It protects the purpose behind them.