Directors' national insurance
When you set up a director in Payroll, you need to specify their directorship details and national insurance (NI) calculation method within their employee record.
A director’s NI normally calculates differently to that of a normal employee which always calculates on a non-cumulative basis. This means that their liability is assessed in each pay run without reference to their earnings from any other pay run. For more information about NI, see HMRC’s National Insurance for company directors booklet.
A person who is a director at the beginning of the tax year (6 April) has an annual earnings period for that tax year even if they cease to be a director before the tax year ends (5 April). The annual earnings period runs from 6 April to 5 April. This means that if you process someone as a director in your payroll but they are no longer one, Payroll will continue to calculate their national insurance (NI) contributions based on the directorship NI calculation method chosen initially until the end of the relevant tax year.
There are two possible methods. The different methods affect how much national insurance (NI) the director pays throughout the tax year. Regardless of the method, they’ll still pay the same amount of NI by the end of the year. Because of this, some directors might prefer to be paid using one method to the other, so it’s important that you understand how each method calculates
- Calculate NI cumulatively – This is most common for directors who are paid irregularly.
- Calculate NI per pay run – Also known as the alternative method, is most common for directors who are paid regularly.
Regardless of which calculation method a director starts the tax year with, they must end the tax year or their employment on the calculate NI cumulatively method.
When a directorship starts part-way through the tax year, the cumulative calculation method always applies for the remainder of the tax year, regardless of the calculation method you choose for the director.
This method calculates the director’s NI liability in each pay run on a year to date basis using the annual earnings thresholds.
This means the director can earn up to the annual primary threshold (PT) before they begin to pay NI and ensures that the director is up to date with their NI contributions when the current pay run is complete.
You can find more information about NI thresholds for the 2018/2019 tax year on the HMRC website.
In each pay run, the director’s total NI liability for the year is determined based on their earnings to date. The amount they’ve paid to date in NI is subtracted from this to determine the amount they must pay in the current pay run.
Pro rata cumulative method
This is a special case of the calculate NI cumulatively method.
An existing employee may become a director part-way through the tax year. Or a director may join the company as a new employee part-way through the tax year.
In either case, the new director will have their NI liability calculated on a pro-rata basis, in which the earnings thresholds are based on the amount of time remaining in the tax year.
You can look up pro-rata thresholds in the HMRC’s National Insurance for company directors booklet. These are based on the week in which the directorship began in this tax year even when the director is paid monthly.
|Example of how pro rata thresholds calculate
This example uses the 2018/2019 NI thresholds.
Catherine joins the company as a director on 19 June. This is in week 11 of the tax year. This means that she is a director for 42 weeks of the tax year, from week 11 until week 52.
Her pro rata PT is calculated as follows:
The value is rounded up to the nearest pound, if necessary.
In this example, this means that:
Pro rata PT = (£8,424 / 52) * 42) = £6,804
Catherine becomes liable for NI when her earnings to date in this tax year exceed £6,804.
This method, calculates the director’s NI liability on a weekly or monthly basis in each pay run, using weekly or monthly earnings thresholds.
Under this method, the director’s NI contributions are calculated in the same way as a standard employee until the end of the tax year. At the end of the tax year, the final pay run includes a recalculation based on their cumulative earnings for the year, and their NI may be higher or lower in that period as a result.
When a directorship starts part-way through the tax year, the cumulative calculation method always applies for the remainder of the tax year, even if you choose the per pay run method for the director.
In this situation, the per pay run calculation method is used from the beginning of the next tax year.
Because this method yields an ‘averaged’ NI liability rather than the director’s exact NI liability for the year, a balancing calculation is carried out at an appropriate time.
This calculation compares year to date earnings to the annual or pro rata annual NI thresholds.
It makes any necessary adjustments to the director’s NI liability.
Generally, the balancing calculation occurs in one of the following circumstances:
- The final pay run of the tax year which may be an extra pay run.
This should occur automatically, even if holidays are processed at year end.
- The director’s circumstances change.
For example, if their NI category changes. In this situation, the previous pay run should be recalculated using the calculate NI cumulatively method.
To do this, click the director’s name in the Edit Pay stage of a pay run and select Calculate NI Cumulatively from the Preferred calc method drop-down.
Another example is if they reach retirement age during the course of the tax year.
- After a bonus has been paid.
If the bonus is large enough that it might otherwise give rise to an excessive NI correction at the end of the year.
HMRC recommends changing to the calculate NI cumulatively method in this situation.
If the balancing calculation occurs partway through the tax year, the director’s NI must be calculated using the calculate NI cumulatively method for the remainder of the year.
To qualify for the per pay run method, the director’s regular pay value must exceed the relevant Lower Earnings Limit (LEL) threshold for the pay run.
In certain situations, you may need to go back to a previous pay run and change the directors’ NI calculation method used in that pay run.
This can lead in turn to all previous pay runs in the tax year being recalculated.
If an employee is marked as a director in week 5, and has been processed using the calculate NI cumulatively method.
It subsequently emerges that their directorship started in the previous tax year.
You go back to week 5 in corrections mode and change the directorship start date. You also change the NI calculation method to calculate NI per pay run.
This recalculates week 5, applying the new calculation method. It also recalculates weeks 1 to 4, treating the employee as a director using the calculate NI per pay run calculation method.
To change the calculation method
To change the calculation method and directorship start details for an employee, carry out the following steps:
- 1. Pay Runs tab > open the pay run you wish to correct > Edit Pay Run.
- 2. Click the director’s name.
- 3. The Edit Tax Details opens, change the directorship start details if necessary.
- 4. Choose the calculation option you require in the Preferred calc method drop-down.
- 5. Click Save.
The pay run recalculates based in the new set of details and previous pay runs may also recalculate.