What bookkeepers should know about director’s national insurance contributions

Director’s NICs can be problematic for many payrollers as the methods used are different from those of other employees and can often seem problematic.

Here the aim is to demystify the process and ensure that the correct amounts are paid to HMRC.

Director’s national insurance contributions (NICs) are, unlike employees, calculated cumulatively using the ‘annual earnings’ method. This is because, historically, payment amounts and frequency of payments made to directors could be made in such a way that NICs could be avoided. This manipulation can no longer be done, but the method is still used to calculate the deductions.

Unfortunately, many employers do not apply the method correctly, and, knowing this, HMRC inspectors often focus on this area during a compliance review.

Definition of a director

For NI purposes the term ‘director’ covers any person performing the function of, or acting in, the capacity of a director. This term includes people such as the company secretary as follows:

• A member of a board, where the company is managed by a board
• A single person, where the company is managed by an individual
• Any person in accordance with whose instructions someone in the above categories is accustomed to act.

Note that there are some exclusions and more details can be sought from HMRC or other professional advisors.

Methodology

For directors appointed before or on the start of a tax year have an annual earnings period for the whole year. This is whether they remain a director for the whole year or not.

The method used is the same as far any non-standard earnings period.

In calculating the NIC liability the standard tables can be used, or the liability worked out using the exact percentage method. Below is the method using the table method

Table method

Using the tables downloadable from GOV.UK

• Divide the total earning to date by 12 if using the average monthly earning to date (or 52 if using the weekly tables)
• Look up the average monthly earnings in the relevant table
• Multiply the figures by 12. This gives the total NIC due to date
• Deduct any NICs already paid in the tax year to date

The remainder is the amount of NIC due for the current period.

Exact percentage method

This method can be used without the tables above, as long as the  current annual NIC limits and thresholds are known.

• Using the annual limits and thresholds, LEL, PT and UEL
• Compare the total earnings to date with the annual limits and thresholds
• Apply the appropriate percentage as shown
• Deduct any NICs already paid in the tax year
• Deduct any NICs already paid in the tax year to date

The remainder is the amount of NIC due for the current period.

Alternative arrangements

With the above methods the deductions for NICs are not spread evenly. Some directors can find themselves paying no NICs during the early part of the tax year, while paying NICs on all their earnings later during the year. Other directors may find that they high NIC liabilities from the outset.

One way around this problem, and one that is acceptable to HMRC, is to treat the directors who are paid regularly, typically monthly, as salaried employees.

• Calculate the NICs due on the monthly earnings for months one – 11
• At month 12 recalculate the NICs at the end of the tax year using the total earnings and the annual limits and thresholds.
• Compare the amount to the NICs already paid during the year before paying month 12 so that amount paid in month 12 can, if required, be adjusted for any differences.

Avoid mistakes to prevent a HMRC visit

It is hoped that this quick outline of the methods to use for calculating director’s NICs is helpful in avoiding any mistakes, and minimise any unfortunate consequences resulting from an HMRC compliance visit.

If a visit from HMRC inspectors is due, just keep calm and check the calculations.

Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.