Directors are classed as employees and pay National Insurance on annual income from salary and bonuses over £11,908.

Contributions are worked out from their annual earnings rather than from what they earn in each pay period.

There are different rules for tax on dividends.

If you’re running payroll

If you’re running payroll

Use payroll software to work out the National Insurance due.

There are 2 different ways of doing this. You may be able to change your method during the tax year depending on your payroll software.

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Standard annual earnings period method

Standard annual earnings period method

This method is common for directors who are paid irregularly.

  1. Each time you pay a director, work out their National Insurance for their total pay over the tax year so far, including bonuses.

  2. To work out what contributions they now owe, take off the total employee National Insurance they’ve paid so far this year.

Alternative method

Alternative method

This method is common for directors who are paid regularly.

  1. Each time you pay a director, work out their National Insurance only on their pay for that period, including bonuses.

  2. At the end of the tax year, use payroll software to work out whether more employee National Insurance is due and deduct it from their last payment.

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What to report to HMRC

What to report to HMRC

Report directors’ pay and deductions in your Full Payment Submission (FPS).

Put one of the following into the ‘Director’s NIC calculation method’ field on your FPS:

  • ‘AN’ if you’re using the ‘standard annual earnings period method’
  • ‘AL’ for the ‘alternative method’

Fill in the ‘Week of director’s appointment’ field.

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When to pay

When to pay

Contributions are calculated on annual earnings but they’re still paid to HMRC after you run your usual payroll (for example, weekly, monthly or quarterly).

The director might be due a National Insurance refund if their category letter changes (for example, because they reach State Pension age).

Use your payroll software to recalculate their National Insurance, either at the time of the change or the end of the tax year.

When an employee stops being a director

When an employee stops being a director

After you’ve paid the employee for the last time, tell HMRC by deleting the ‘Director’s NIC calculation method’ entry in the FPS.

Work out any National Insurance due using payroll software. Deduct any National Insurance the director owes from their last payment.

If the director is still your employee

If the director is still your employee

Calculate their National Insurance based on their earnings for the whole of the tax year, as if they were still a director.

From the next tax year, calculate their National Insurance as an employee based on each pay period.