How is Directors NI Calculated in the UK?
As a rule, the directors of a company need to pay National Insurance because they are ‘classified as employees‘.
They pay NI on any annual income received through salary and bonuses over the current threshold of £9,880.
But, you can use their annual earnings to work out their NI contributions – instead of using the amount a director earns in each pay period.
Note: A company director running payroll as the only employee still needs to pay employer’s National Insurance on salary. Different rules apply for paying income tax on dividends.
Work Out NI Using Payroll Software
Calculating National Insurance for company directors is easier if you are using payroll software (e.g. BPT). Even though there are two ways to do it, you can usually change the method during the tax year.
Standard Annual Earnings Period
The annual earnings period method is used most often for company directors who don’t get paid on a regular basis.
- You can work out a director’s National Insurance for their total pay over the tax year each time they get paid (including bonuses).
- Determine the contributions they owe at any particular time by subtracting the total employee NI they paid so far in a given tax year.
Using an Alternative Method
The alternative method is used most often for company directors who receive regular pay.
- Work out a company director’s National Insurance for their pay of a given period when they actually get paid (including bonuses).
- You can use payroll software to work out whether they owe more employee National Insurance at the end of the tax year. If so, you would need to deduct the amount from their last payment.
Reporting Directors National Insurance to HMRC
You can use Full Payment Submission (FPS) to report directors’ pay and deductions by inserting ‘AN’ or ‘AL’ into the field marked ‘Director’s NIC calculation method’. So for example, put (either):
- ‘AN’ when using the ‘standard annual earnings period method’.
- ‘AL’ when using the ‘alternative method’.
Note: Remember to fill in the information needed to show the ‘Week of director’s appointment’ in the relevant field.
Paying National Insurance for Company Directors
In general, HM Revenue and Customs calculate company director NI contributions on annual earnings. But, you must make the payments to HMRC after running regular payroll tasks (e.g. weekly, monthly, quarterly).
Changes to NI Category Letters
Directors may be able to claim a National Insurance refund if their category letter changes (e.g. they join your contracted-out pension scheme).
If so, you can use your payroll software to recalculate their National Insurance. You can choose to do it when the change occurs or at the end of the relevant tax year.
Note: Another section explains more about how National Insurance rates and categories work and the different employee groups.
What if an Employee Stops Being a Director?
You would need to inform HMRC after paying an employee for the last time (e.g. when an employee stops being a director). Thus, you should delete the entry in your FPS marked ‘Director’s NIC calculation method’.
Use your payroll software to work out whether any National Insurance is due. You can then deduct any National Insurance owed by the company director from their last payment.
What if the Director Remains Your Employee?
Your responsibility changes if the director stays on as your employee. In this case, you would need to calculate their NI based on their earnings for the whole of the tax year (e.g. as a director). Then, calculate their NI as an employee based on each pay period from the next tax year.