How are NICs calculated for a director who receives the same salary each month?

Special statutory arrangements for the calculation of Class 1 NICs apply to company directors. The primary and secondary contributions due on a director's salary, fees, bonuses, and payments to or amounts overdrawn from a loan account, are calculated using,

• if a person is a director at the start of a tax year, an annual earnings period, or
  
  
• if a person becomes a director during a tax year, an earnings period that is equal to the number of tax weeks remaining in the tax year (often called a "pro-rata" annual earnings period).

The use of an annual earnings period for directors is a measure to counter NICs avoidance by making a single annual payment and calculating NICs using a monthly earnings period. For example, the primary NICs (2008/09 rates, Table Letter A) on a single payment of £120,000 would be

• £1483.87, using a monthly earnings period, but
• £4606.15, using an annual earnings period.

However, by concession, HMRC allows employers to calculate directors' NICs using a weekly or monthly earnings period if

• the director has consented to the employer using this method, and
  
  
• by the end of the year, the NICs collected are least as much as they would have been if the annual earnings period had been used.

If the director receives only a monthly salary throughout the tax year that exceeds the NICs upper earnings limit (UEL) for each earnings period (e.g. £3,350 for a month during 2008/09), the total NICs using this "alternative administrative method" will generally be the same as if the annual earnings period had been used. Nevertheless, the employer must recalculate the NICs at the year-end to ensure that there is no shortfall in the NICs due, relative to the statutory annual earnings method. In a computerised payroll system, this is achieved by resetting the "director" indicator for the employee for the last payment of the tax year.

The alternative method is not recommended where the director

• has irregular earnings, or
• earns less than the UEL in any month during the year.

The following Table compares the annual earnings period method and the alternative method, showing the NICs payable for a director with a salary of £120,000, paid in £10,000 instalments every month for a full year. (Using NI category A and NI rates for 2008/09, and the exact method of calculating NICs)

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