Directors National Insurance

Directors National Insurance is calculated in a different way to a normal employee. Normal employees are calculated on the pay in the period, so weekly/monthly etc.

Directors National Insurance is calculated annually so will be different than a normal employee if there are any changes to pay during the tax year.

To further complicate matters, there are two calculation methods that can be used in director payroll, known as the Annual calculation and the Alternate method

Whichever method is used, the employee and employer national insurance will end up the same for directors.

Annual Calculation

No National insurance deductions are made until the director reaches the NI thresholds – currently £12570 for employees and £9100 for employers in the tax year 2023 to 2024.

Above these thresholds, the standard rates of National Insurance apply.

HMRC recommend using this method when pay fluctuates.

In effect, it means that no NI is paid at the start of the tax year and is deducted once the allowance has been used up.

Alternate Method

The director pays National Insurance from the first pay period like a normal employee, so is assessed on the pay each pay period.

At the end of the tax year, or when the director leaves, a final calculation is made, and any difference between the amount due and the amount deducted, an adjustment is made. This can result in a large unexpected deduction or refund.

HMRC recommend using this method when pay is not expected to change during the tax year – this includes bonuses etc.

You can change from one method to another – here at Director Payroll we would do that at the start of each tax year to avoid any complications.

What if a Director Leaves

If a director stops being a company director but remains as a normal employee, they remain on the particular directors NI method until the end of the tax year and then revert to being a normal employee.

For any further guidance, here is a link to HMRC  https://www.gov.uk/employee-directors