Special Rules for Directors’ NI Contributions

NI earnings periods

NI contributions on salaries are worked out on the amount paid in an NI “earnings period” for which HMRC sets various thresholds. Usually, your payroll software automatically takes account of these so that if an employee is weekly paid the weekly thresholds are used or if they are monthly paid the monthly threshold applies. An exception to this is directors’ NI contributions. They must always be calculated using an annual earnings period regardless of the salary pattern.

Calculating directors’ NI contributions

Applying an annual earnings period strictly means that the timing of a director’s NI contributions differs markedly from that of an employee’s.

Example – monthly paid employee. Barney works for Acom Ltd. His salary for 2020/21 is £3,000 per month. Each month he pays NI of £264.96 (12% of salary over the primary earnings threshold of £792). Acom’s NI is £312.98 (13.8% of salary over the secondary earnings threshold of £732). For the whole of 2020/21 the NI costs are £2,964 and £3,756 for Barney and Acom respectively.

Example – monthly paid director. Daryl is a director of Acom. He takes a monthly salary of £3,000. Neither he nor Acom pays NI on the salary until Daryl’s earnings for 2020/21 exceed the annual earnings thresholds. Thereafter NI applies to all the salary. This means Daryl pays no NI for the months of April, May and June 2020 but the amounts payable for July 2020 through to March 2021 are greater by comparison with that payable by Barney on the same amount of salary. However, by the end of the tax year they will have paid the same. The employers’ NI pattern is also different for Acom, but again balances out by the end of the tax year.

The alternative calculation

In practice, directors often have their NI calculated using the alternative method permitted by HMRC. This spreads the contributions more evenly. It’s also common for directors’ NI to be worked out using the normal method for employees, even though strictly speaking this isn’t proper.

Year-end review can be vital

Whichever method is used to work out a director’s NI contribution it must be reviewed at the end of the tax year. This will be done automatically by your payroll software, but only if:

• the “director” indicator has been noted in the payroll software; and
• the payroll is run for week 52/month 12 of the tax year regardless of whether the director has been paid for that period. This is especially relevant for 2020/21 for directors who have suspended their salary, say, because of financial constraints on their companies caused by the pandemic.

In our experience there are many cases where, by mistake or oversight, the final month review doesn’t occur and as a result directors and their companies are overpaying NI.

Tip. If you run your payroll check that the “director” indicator is shown if applicable, and ensure they are included in a payroll run for week 52/ month 12 of 2020/21, even if they aren’t being paid. If someone else, e.g. a payroll bureau, does the calculations make sure they do the same. This will ensure any overpayment of NI will show up.