UK company directors are treated differently from other employees when it comes to National Insurance. This is because they are considered to be self-employed, even if they only work for one company. As a result, they have to pay National Insurance on their own behalf, rather than through their employer.

Types of National Insurance for Directors

There are two types of National Insurance that directors have to pay:

• Class 1 primary: This is paid on all earnings over £11,908 per year. The rate is 12%.
• Class 1 secondary: This is paid on all earnings over £9,568 per year. The rate is 13.8%.

Furthermore, directors can also choose to pay Class 3 National Insurance, which is a voluntary contribution. This can be useful if you want to build up your National Insurance record or qualify for certain benefits.

How to calculate Directors National Insurance

There are two methods of calculating directors' National Insurance:

• The annual earnings period: This is the standard method used for calculating National Insurance. Your earnings for the whole year are added up and then the National Insurance rates are applied.
• The cumulative earnings period: This method is used if you want to pay National Insurance on your earnings as you go. You simply add up your earnings each pay period and then apply the National Insurance rates.

It's important to note that you can only use the cumulative earnings period method if you're a company director and you're not also an employee of the company.

If you're a company director, it's important to be aware of your National Insurance obligations. By understanding how National Insurance works, you can make sure that you're paying the right amount and that you're building up your National Insurance record.

Conclusion and good to know

As a UK company director, you'll need to pay both employee's and employer's national insurance contributions. The rates and methods of calculating your national insurance contributions will depend on your specific circumstances, such as your earnings or share of the company's profits. Keep track of your national insurance obligations to ensure you're paying the correct amount and avoiding any penalties.

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In the United Kingdom, UK company directors are treated differently to other employees when it comes to national insurance contributions, how they're paid, and how they're deducted. In this week's I Hate Numbers Podcast I'm going to be looking at why that should be, why directors are treated differently.

We're going to look at the methodology and the types of national insurance paid by company directors. And lastly, we're going to look at the two methods that can be adopted, or one of the two methods I should say, to how to actually work out the deductions. As a spoiler alert, by the way, whichever method is chosen to do the calculations,

the total amount of national insurance due over a year will be exactly the same.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood. I'm a business finance coach and accountant of over 28 plus years running my businesses, I Hate Numbers and also my business-planning company called Numbers Knowhow. Over the 28 plus years, I've helped thousands of business owners increase their financial understanding, make more profits in their business,

make better decisions, improve the battle that goes on between their ears and have the business lifestyle they aspire to. And I'd love that for you. Let's crack on with the podcast. The first thing is to provide some degree of background and context as to why company directors are treated differently. In the context of company law in the context of running a company,

directors are ultimately the key decision-makers. They can influence how much salary they receive on a month-by-month basis. They can determine the method of remuneration. And because they're in that particularly unique position compared to employees, HMRC will be concerned that they could manipulate my words

I’m using, the amount they pay with a primary principle of minimising and avoiding tax. Now, tax avoidance isn't illegal, but HMRC are concerned about that loss of tax revenue, nevertheless. So, as a consequence, they have a special unique set of rules for company directors. Now, if you're a small, medium-sized business, you as the director may also be the shareholder, but it's the directors who make those decisions in the running of the company,

method of remuneration, and also, by the way, folks, for deciding what level of dividend a shareholder will receive. More of that in our future podcast. Now, company directors of the United Kingdom pay national insurance on their earnings. And earnings, in this context, are defined as salary and/or bonuses in addition to that. Dividends that may be withdrawn are not part of that earnings number.

Now, on those earnings class one, or if you want to be more specific, primary class one contributions are paid on those earnings. They are deducted by the company employer as the employer. They're deducted and paid over to HMRC accordingly. If we are looking at the tax year 22/23, which officially runs between the 6th of April 22 and the 5th of April 23, then anything up to 11-9-08, there is no national insurance due.

For the year 23/24, which is the 6th of April 23 onwards, that figure moves up to 12-5-70. Check the show notes, by the way, folks, for a link to the more detailed rates via HMRC. Now, if a company director has earnings in excess of 11-908 for 22/23, they will pay top percent national insurance contributions. That stays at that rate

until what's called a higher rate limit is reached, which is just over 50,000 pounds for 22/23, and 23/24. Once it goes over that figure, by the way, an extra 2% is applied. Now, the calculation methodology, let me explain how it's done for non-company directors. So, what would normally happen is we look at an employee's salary, say for a month,

we take off the equivalent amount of national insurance that would be free, for which nothing is due for that particular month, and just as a working number, that's approximately a thousand pounds a month. So anything up to a thousand pounds, no national insurance is due; anything over a thousand pounds,

national insurance is deducted at the rates that I've commented on earlier: 12%, and if it is a real high-earning salary, then it's going to be a 2% supplement. Now, that's the normal method that's adopted for employees. Now, when it comes to company directors, that's not quite the same methodology, and this is where we come to our final part of our podcast, where we look at the two methods available to a company to choose how they calculate the national insurance

that's due, deducted and paid over. And remember, whatever method you adopt, it makes no difference to the total amount that's due over a year. Now, method number one, to give its full official title, is called a Standard Annual Earnings Period method. Don't you just love a long title? Now, this method is common

for directors who may be paid irregular amounts. So, they may be paid a small salary at the beginning, a higher salary later on in the year. What will happen is that you look at that situation and you are looking at what's called a running total. Now, if we take our reference figure of about 12,000 pounds, if I was a company director with a salary of 1000 pounds,

what would happen is in month one, nothing would be due, in month two, if I'm earning a thousand pounds again, nothing is due because that's only 2000 pounds, and so it continues. Let's assume I gave myself after six months a 5,000 pound salary. That's what I awarded myself. Well, then what you're going to have then is a total of 9,000.

It's not quite yet the 12,000 threshold. Nothing is due. Now, when you get to a point in the year that your total salary exceeds the annual figure, then you pay national insurance on the whole lot in excess of that limit. Now, what that would mean typically is that for the first few months, typically, for most company directors, no national insurance is deducted.

And then, once you go over that annual limit, you pay national insurance on the whole lot. So, from a cash flow perspective, that can be quite positive. Psychologically, sometimes it confuses directors. They think, oh, I'm not paying anything on my salary so far, and suddenly you get a big national insurance bill that comes towards the end.

So again, you have to factor in which one suits you better. For most of our clients, we typically use the annual earnings method because a typical tax planning approach is that directors do not draw down an excessive salary normally. Their pay packet is made up of a combination of factors. And again, watch out for our podcast.

Check out the show notes for links to other options available to companies. Now, the alternative method is normally seen where directors are paid a regular fixed amount, and what happens is that each month that goes by, you look at their salary, you look at the national insurance free amount, you work out the difference,

and if national insurance is due, then you take off the national insurance at that point in time. So, each month it may be the director pays some national insurance. Now, what will happen is in the final month of the year, typically the software, or you can use manual calculations if you so desire, we'll look at the total earnings over the 12 months, work out the difference after deducting the national insurance limit, and then working out the national insurance on that figure.

Compare that to whatever's been paid previously, and again, it may mean you've either got a little bit more to pay in that final month, or as happens quite often, you may get a little bit of a refund. Now, one thing to consider in terms of personal preference of the two methods adopted on balance, I prefer the annual earnings method because what that means is there's less slippage if a director is late, if the company is late paying their national insurance.

That could create lots of different issues and problems. So therefore, it's probably best to pay nothing at all in the earlier time periods and avoid that having to do actual payments. And then, in the final few months of the year, then you make those payments accordingly. But just make sure that's factored in into your cash flow and to your understanding. Folks, I hope you found this podcast of use.

I'd love to hear your thoughts. How do you calculate national insurance for your payroll? Which one do you prefer? Do you prefer the annual or alternative? Is that left completely to your accountants to calculate? Let me know what you think. Now, the I Hate Numbers Podcast isn't just about tax. It covers a whole wide range of topics.

If there are topics that you'd like covered on a future I Hate Numbers Podcast, let me know. Until that time, folks, I'll see you on the other side. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.