How do we handle the NICs for a director who is leaving the company mid-year?

The calculation of primary and secondary Class 1 NICs for company directors is the same as for employees in general, except that an annual earnings period is used. The effect on the director of applying an annual earnings period is that

• no primary NICs are due until the director's earnings in the year to date reach the annual earnings threshold (£5,435 for 2008/09),
  
  
• primary NICs are then due at the appropriate rate on all earnings up to the annual upper earnings limits (£40,040 for 2008/09), and
  
  
• primary NICs are then due at 1% on earnings above the upper earnings limit.

For example, a director with monthly earnings of £5,400 would pay no NICs in month 1, would start paying NICs in month 2, would have paid the bulk of the NICs by month 8, and pay only the 1% NICs for the rest of the tax year.

If the director's NICs have been calculated using an annual earnings period, nothing special need be done when a director leaves part way through a tax year.

However, if a director is paid using a regular earnings period, e.g. the annual salary is paid in equal monthly instalments, and has earnings of at least the lower earnings limit, the primary and secondary NICs may be calculated using a normal earnings period, e.g. monthly, as used for employees in general. This is achieved, in a computerised payroll, by removing the "director" indicator for the employee. The director must have agreed to this method of assessment. Even if this alternative method is used, the director continues, in principle, to have NICs liabilities based on an annual earning period. Consequently, by the end of the tax year, the total NICs for the year must be as much as if the annual earnings period had been used.

Therefore, if the alternative method is used, the NICs due on the final payment of earnings for November must be calculated using an annual earnings period. In a computerised payroll system, this is achieved by resetting the "director" indicator for the employee for that last payment. The result of this will be that the director pays, in one go, all of the NICs that would otherwise have been due if an annual earnings period had been used for the tax year to November.

If the director's final payments are not enough to cover the primary NICs that are due, the remainder must be paid by the employer.

The following example, based on the situation of a director with monthly earnings of £5,400, illustrates the situation. NICs Table Letter A is used. The director is leaving at the end of November 2008.


*NICs for Month 8 calculated using Annual Earnings Period

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