If you have a UK company , then you need to understand directors National Insurance.  In this vlog I am going to explain

  1. Firstly, why UK directors are treated differently for National insurance
  2. Secondly, what National Insurance directors pay
  3. Lastly, the two methods of calculating National Insurance if running a payroll

What is National Insurance

National Insurance, or NI for short, is tax paid by employees, self-employed individuals, and employers in the United Kingdom.  The money collected funds state benefits and services, such as the NHS and state pensions.

If you’re a UK company director, understanding National Insurance is essential.  It can often feel complicated and overwhelming.  However, with the right knowledge and advice you can easily stay on top of your NI contributions.

This vlog post aims to demystify the topic for small businesses, arts organisations, social enterprises, SMEs and any other companies that require an understanding of how NI works.

Why directors are treated differently for National Insurance purposes

UK company directors are treated differently for tax and national insurance contributions (NICs) compared to other employees because of their dual status as both an employee and employer of their company. Unlike other employees who only pay employee NICs on their earnings, company directors are required to pay both employee and employer NICs.

As an employee of their company, directors must pay employee NICs on their earnings. However, as an employer, they must also pay employer NICs on the salaries and bonuses they pay to their employees. This is because the government sees company directors as having greater control over their own income and the income of their employees compared to regular employees, and therefore, they are expected to contribute more to the national insurance fund.

Furthermore, because company directors have greater flexibility in determining how much they pay themselves in salaries, bonuses, and dividends, the government aims to prevent directors from taking advantage of this flexibility to avoid paying the appropriate amount of national insurance. As a result, directors are subject to additional rules and regulations to ensure that they pay the appropriate amount of tax and national insurance contributions.

In summary, UK company directors are treated differently for tax and national insurance contributions because of their dual status as both an employee and employer of their company and their greater flexibility in determining their own income and that of their employees.

National Insurance for company directors

Directors are classed as employees and pay National Insurance on annual income from salary and bonuses over £11,908 for 2022-23.  For the tax year 2023-24 this goes up to £12,570, the same level as the personal allowance.

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

How is National Insurance for directors calculated when running payroll

There are 2 different ways of doing this. In principle you can change the method during the tax year.

Standard annual earnings period method

If you are paid irregularly this method is commonly used .

  1. Each time you pay a director, work out their National Insurance for their total pay over the tax year so far, including bonuses.
  1. To work out what contributions they now owe, take off the total employee National Insurance they’ve paid so far this year.

Alternative method

If you are paid a regular amount you may find this method useful.

  1. Each time you run your payroll work out your National Insurance on your pay for that period.
  1. Adjustments take place at the end of the tax year.

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