Regardless of their actual pay interval, company directors have an annual earnings period. Where a client is a company director, it is important that they understand the special rules for company directors, and the options open to them for calculating National Insurance throughout the tax year.
Under the annual earnings period rules, National Insurance for the tax year is worked out by reference to the annual rates and limits on a cumulative basis. For 2021/22, the annual lower earnings limit is £6,240, the primary threshold is £9,568 and the annual upper earnings limit is £50,270, and the annual secondary threshold is £8,840.
Where an annual earning period is used, the client will pay no employee’s National Insurance until earnings for the year reach £6,240. Contributions are then payable at a notional zero rate until earnings reach £9,568. Thereafter, contributions are paid at the rate of 12% until earnings for the year reach £50,270. Contributions on any further earnings are payable at the rate of 2%. The contributions that are deducted from a payment of earnings are found by working out the total contributions due on the earnings for the year to date, and deducting the total contributions already deducted from earnings previously paid in the tax year.
A similar approach is adopted for secondary contributions; no employer contribution are paid until earnings for the year to date reach £8,840, with contributions being paid at the rate of 13.8% on all further earnings in the tax year.
The disadvantage of this approach is that while the director may be paid the same amount each month, the contributions deducted can vary significantly. To overcome this, the client may prefer to take advantage of the Alternative Arrangements. Under these arrangements, National Insurance is worked out on a non-cumulative basis for each pay period (as for other employees) until the last pay period. When the director is paid for the final time in the tax year, the liability is recomputed on an annual basis, with any balance owing being deducted from earnings paid in that final period. This allows the liability to be spread more evenly throughout the year.
Written by the Tax Advice Network