National Insurance Contributions (NIC) are calculated annually for company directors. This differs from the calculation used for normal employees who have their NIC calculated for every pay period.
A company director is one of:
A member of a board of directors.
A single person managing a company, even if that person is the company’s only employee.
A person who directs the work of one of the above.
NIC's becomes due once the director’s earnings exceed the Primary Threshold in a tax year.
Employee NIC Primary Thresholds (PT)
2022-2023 Tax Year is slightly different and the year is split into different thresholds.
6th April until 5th July £9,880
6th July until 5th April £12,570
This creates an annual threshold of £11,908.
Previous years:
2021 - 2022 £9,568
2020 - 2021 £9,500
2019 - 2020 £8,632
Employer NIC Secondary Threshold (ST)
2022-2023 £9,100
2021-2022 £8,840
2020-2021 £8,788
2019-2020 £8,632
Employer's National Insurance still needs to be paid, even if the only employee is the director.
Methods for Calculating National Insurance Contributions
There are two calculation methods that can be used. Whichever method is chosen, both the employee and employers NIC will calculate the same.
Annual Calculation
No NIC are due until the director has earned £11,908. Employer's NIC will be due earlier when £9,100 is reached.
NIC's are then due at the standard rate.
This will result in the director paying little or no NICs at the start of the tax year and more at the end.
This is the best calculation to use if the directors pay varies from month to month as all the NIC will be paid when they are due and there are no surprises in March.
Alternative Calculation
The director pays NIC in the same way as a normal employee each time they are paid.
At the end of the year (or when the director’s employment ends) a final annual calculation is made, any difference between the amount due and the amount paid to date must be paid or refunded.
You should use this calculation if the director is paid the same amount each month as the NIC will be paid evenly throughout the year.
However, this calculation can cause problems if the director is paid a bonus one month or forgoes pay another as the final annual calculation may result in a large NIC bill or refund.
If situations change the director can move from the alternative method to the annual method at any time in the year. They cannot move back from the annual to alternative method.
What if a directorship ends during the year?
If the director stops being a director but continues to be employed by the company, then they must remain a director for NIC until the end of the tax year.
If the director leaves the company and is using the alternative method of calculation, then the final annual calculation is made the last time they are paid.