In the UK, if an employee is a "Director" of a company, HMRC need to be informed as the calculation relating to National Insurance is different to a none director.
When to mark someone as a director?
They are a statutory director listed at Companies House - ie., Officially appointed to the board of a limited company.
They are acting as a director, even if not formally appointed - HMRC calls this a "Shadow Director" Someone who makes decisions and give instructions as if they are the director.
Why must this be done?
HMRC applies different National Insurance (NI) calculation rules for directors, especially around:
Annual Earnings Basis for NI rather then pay per period like a regular employee.
Secondary threshold and limits
Both the above effects how NI is calculated and paid through Payroll.
How is this done within Payroll?
Payroll are notified if an employee is a Director via the onboarding template. The column "director start date" should include the same date as the hire date.
Payroll transact this information in RSM, which updates the employees NIC calculations.
HMRC are informed via monthly reporting of FPS.