Different calculation required for Company Directors National Insurance Contributions

National Insurance (NI) is a deduction from earnings, set up originally to fund various State benefits such as the NHS and the State pension. In reality it is another form of taxation.

If you are a director of a limited company, you are an employee of the company. You will therefore need to pay Class 1 NI on your earnings. The limited company is also liable to pay Class 1 NI as your employer.

Employees pay Class 1 NI of 12% on earnings between £149 and £797 per week and 2% above £797 per week (for the tax year 2013/14).

Employers pay Class 1 NI of 13.8% on earnings above £148 per week (for the tax year 2013/14). There is no lower rate of Employer NI on earnings above £797 per week.

Directors’ National Insurance

A company director’s NI is calculated differently to that of an employee.

An employee’s NI liability is calculated based on their pay frequency, for example weekly or monthly. This means that their NI is assessed in each pay run without reference to their earnings from any other pay run.

Directors however have an annual earnings period. By the end of the year they must have paid over the amount of NI due in relation to their earnings for the whole year.

Method of NI calculation for directors

There are two ways a director’s NI can be calculated:

  • Cumulative basis
  • Alternative method

The cumulative basis is the preferred calculation method. In effect the NI contributions are calculated on a cumulative basis taking into account the NI collected in previous periods.

The alternative arrangement is to operate an earnings period in line with the payroll frequency. There are various qualifying conditions in place to allow this arrangement. Using this method of NI calculation, in the final payment in the tax year you must reassess the NI due on director’s total earnings using the annual earnings period and include any adjustment to the NI due in the year. You will also need to recalculate the NI due if an individual resigns from the position of director during the tax year.

Overall both methods will result in the same amount of NI being deducted and it will only be the timing of the NI deduction that differs.

Why is there a different NI method for directors?

Directors can have irregular payment patterns and they often have the power to influence how and when they receive their pay. This means that if their NI was calculated under the ‘normal’ basis they could pay their annual salary in one single week and then pay much lower NI than a normal employee who is paid the same amount but spread over the whole year.

For more information on Director’s National Insurance or on any other payroll matter please contact Neil Cameron, payroll manager on 0131 558 5800 or neil.cameron@chiene.co.uk.