As a company director, your earnings are subject to National Insurance (NI) in the same way as all employees’ earnings are. It is treated differently in the way it’s calculated.
If you’re a limited company director, you’ll pay both employers and employees National Insurance Contributions on a salary above the current threshold.
This is because earnings paid to the director through the company are treated as wages. Wages are subject to Class 1 National Insurance Contributions (Class 1 primary). You are also liable to pay employers National Insurance (Class 1 secondary) on the earnings of any employee who earns above the threshold.
Let’s take a look at the current thresholds:
- Class 1 primary: The director pays National Insurance on any wages/salary/bonus paid through the company where the total for the year is in excess of £12,570 for 2023/24.
- Class 1 secondary: The company pays National Insurance on the director’s wages paid through the company where the total for the year is in excess of £9,100 for 2023/24.
It’s important to note that NI is only payable on salaries and bonuses and not on dividends. Check out our blog on Salary Vs Dividends to understand what your options are. It might be more beneficial as a company director to draw dividends out of the business.
Directors can pay NI on a cumulative basis, rather than month by month
Historically, as a company director you were able to change the frequency and amount of your salary payments to avoid paying National Insurance. To prevent this manipulation, HMRC changed the rules so that company directors pay NI on a cumulative basis.
This effectively means you would get all of your NI allowance of £12,570 for 2023/24 upfront. This is unlike other employees who get their allowance divided by the number of pay periods in a tax year.
Under the standard annual earnings method, if an employee was on an annual salary of £15,000 they would pay NI on their monthly earnings over £1,047.50 (£12,570/12). As a director, the NI deductions would not start until the 10th month of the payroll calendar. You get to use all of the £12,570 first before NI deductions apply.
This method is better for Directors who are paid on an irregular basis.
There is an alternative method, if your pay is more regular
The alternative method looks at the NI due for that pay period only. At the end of the tax year adjustments are made from your last pay to flush through any differences.
If you start the tax year as a director under the annual scheme your NI calculations will continue on the same scheme until the next tax year. This is the same even if you cease to be a company director in the tax year.
Along with figuring out the best way to pay yourself from your limited company, it can feel like there’s a lot to know about the tax side of being a director (and lots you don’t know you don’t know!). Don’t feel ashamed or afraid to ask if you need help figuring out what to do.
Though there is legislation to follow, a lot can depend on your individual circumstances. We want to make sure you’re not paying either too little or too much in tax. Have a chat with us and get the support you need.