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Understanding national insurance for company directors
Understanding national insurance for company directors
Rebecca Russell avatar
Written by Rebecca Russell
Updated over a week ago

Calculating national insurance for your company directors might seem daunting at first, but there are just two calculation methods to understand.

What is a company director?

The HMRC defines a company director as:

  • A member of a board or body, where the company is managed by a board

  • A single person, where the company is managed by an individual

If you're not sure, please refer to HMRC's CA44 handbook, or contact HMRC directly.

Directors national insurance categories

A director's national insurance category works in the same way as any other worker or employee in that their letter is based on their own personal circumstances and age. There is no special category for a director.

Methods for calculating directors national insurance

There are two methods that can be used for calculating a director's national insurance:

  • Calculate NI per pay run - This method calculates national insurance non-cumulatively. It matches the method used to calculate national insurance for regular employees and workers. I.e., the director pays national insurance on earnings over the primary threshold in each pay period. However, in the final pay period of the tax year, national insurance is recalculated on a cumulative basis to ensure there have been no underpayments or overpayments.

  • Calculate NI cumulatively - Throughout the full tax year, national insurance is calculated cumulatively. This means using the annual thresholds; therefore, the director only pays national insurance once they exceed the annual primary threshold.

It's worth noting that by the end of the tax year, there's no difference in the national insurance contributions that a company director will pay within the tax year; however, the distribution of national insurance contributions will vary.

The company director should choose which calculation method they prefer, then simply choose the relevant option in their employee record.

Deciding which method to use

It's a director's choice which method they prefer for their national insurance calculation, but there are some factors that they should take into account before choosing:

  • The chosen method will remain in place until the end of the tax year if a director resigns as a company director but remains an employee within the same tax year.

  • Once a method has been applied in one pay period, this method will remain in place for the remainder of the tax year.

  • Directors who opt for the annual method may not pay national insurance in the first few periods of the tax year, and their earnings may not be consistent through the tax year.

  • If using the non-cumulative method, the national insurance contributions are recalculated on a cumulative basis, either in the final period of the tax year or in the final period that they're paid before leaving. This ensures they've paid the correct level of contributions (this only applies to directors and not to employees).

  • Using the non-cumulative ensures consistent national insurance throughout the year based on their earnings. While the cumulative method means national insurance will be inconsistent, it avoids an unexpected underpayment or overpayment at the end of the tax year.

Earnings for company directors

There is no change to what constitutes earnings for company director national insurance calculations.

Their earnings are subject to national insurance in the same way as earnings for employees and workers are. These include things such as:

  • Annual salary

  • Director fees

  • Annual bonuses

The cumulative calculation method

Company directors who choose to have their national insurance calculated cumulatively can earn up to the annual primary threshold (£12,570) before they pay national insurance.

In the 2023-2024 tax year, from January 2024, they'll pay 11.5% of earnings above the primary threshold until they reach the upper earnings limit (£50270), after which they will pay 2% national insurance.

Note: From April 2024, this changes to 10% on earnings above the primary threshold in line with employees and workers.

Selecting the method in the employee's record

The director national insurance calculation method can be selected either in your onboarding month with PayFit or when the employee first becomes a director. This is in line with HMRC's guidance.

To assign the director's national insurance calculation method:

  1. From the employee's record, click the Employment tab.

  2. Under the HMRC information section, click Edit.

  3. Within the National Insurance section, toggle on the Is <employee> a company director? option.

  4. Enter the date that the employee was appointed as a company director.

    Note that this date determines the annual thresholds to use, so it's important that this date is correct.

  5. From the Director's NIC calculation method dropdown, choose the relevant option.

  6. Select whether the employee has a contract of employment or not.

  7. Click Save.

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