Shownotes
National Insurance Contributions (NICs) work differently for company directors—and misunderstanding them can cost you. In this episode of the I Hate Numbers podcast, we walk through the 2025–26 rules, salary thresholds, and two key methods of NIC calculation. Whether you take a regular wage or one-off payments, knowing how to handle director NICs can save you money, reduce stress, and keep HMRC off your back.
Main Topics & Discussion
How Director NICs Differ From Regular Employees
- Directors have an annual earnings period, not weekly/monthly thresholds
- HMRC calculates NICs based on total annual earnings
- Irregular pay? No problem—NICs are smoothed out over the year
- Directors are not subject to minimum wage laws
Two Methods for NIC Calculation
1. Annual Earnings Method (Default)
- Works on cumulative pay vs. annual thresholds
- Ideal for directors taking irregular or one-off salary payments
- Flexible but may result in large NIC bills late in the year
2. Alternative Method (Regular Earnings Basis)
- NICs calculated monthly like regular employees
- Ideal for steady monthly salaries
- Requires end-of-year reconciliation to ensure total NIC due is paid
2025–26 NIC Thresholds & Rates
- Primary Threshold (Employee): £12,570 (NIC starts here)
- Upper Earnings Limit: £50,270 (NIC drops to 2% above this)
- Employer NIC Threshold: £5,000 (NIC starts here)
- Employee Rate: 8% (then 2%) | Employer Rate: 15%
Choosing the Best Method
Annual Method
- Best for flexible, irregular salary patterns
- Slower NIC buildup—good for cash flow
- May cause unpredictable deductions
Alternative Method
- Best for steady monthly salary (e.g. £1,200/month)
- Predictable deductions, easier budgeting
- Must reconcile at year-end; risk of surprises if ignored
Salary Planning Options
Option 1: Pay £5,000 Salary
- No income tax, employee NICs, or employer NICs
- Doesn’t qualify as a state pension year
Option 2: Pay £12,570 Salary
- Full personal allowance used
- Triggers NICs but qualifies for state pension
- Check employment allowance rules if sole director
Common Mistakes to Avoid
- Using annual method without tracking thresholds
- Forgetting year-end reconciliation under alternative method
- Assuming £5,000 salary qualifies for pension—it doesn’t
- Missing out on planning opportunities that reduce NIC and tax
Real-World Examples
- One-off annual salary: Use annual method
- Monthly wage of £1,200: Use alternative method
- Reconcile by March or risk penalties
Final Thoughts
Director NICs give you flexibility—but require careful planning. Choose the right method, monitor thresholds, and don’t leave payroll to chance.
Links Mentioned in This Episode
Episode Timecodes
- [00:00:00] – Intro: Why this matters for directors
- [00:00:32] – Director NIC basics vs employees
- [00:02:00] – Method 1: Annual Earnings Method
- [00:03:48] – Method 2: Alternative Method
- [00:05:53] – NIC thresholds and rates for 2025–26
- [00:06:33] – Comparing the two methods
- [00:08:00] – Salary planning tips
- [00:09:09] – Common NIC mistakes to avoid
- [00:10:00] – Real-world examples
- [00:10:55] – Final thoughts & next steps
Host & Show Info
Host Name: Mahmood Reza
About the Host: Mahmood is an accountant, business finance coach, and founder of I Hate Numbers. With decades of experience advising directors and small businesses, he helps you plan it, do it, and profit.
Podcast Website:https://www.ihatenumbers.co.uk/i-hate-numbers-podcast/🎧 Listen & Subscribe to I Hate Numbers
Make your director NICs work for you. Or listen on Apple Podcasts, share this episode, and check out the I Hate Numbers book for smarter business planning tips. Plan it. Do it. Profit.
Additional Links
Transcripts
Welcome to another episode of I Hate Numbers. I'm your host, Mahmood, and if you're a small business owner or a company director, this episode is going to act as your financial satnav for NICs or National Insurance Contributions (to give it its full title). Because when you know how the rules work, you will save money, you will reduce your stress and you are in a stronger position to understand what's going on in your business.
::And you also minimise that HMRC grief. Let's crack on.
::I want to stir up with the basics, first of all. And it's got to be said that National Insurance for directors is not the same as for regular employees i.e. non-directors. So, if you run your own limited company or you manage payroll for one, sit back, relax, listen closely. Now, directors in a lot of things, are treated differently to other employees.
::And in this context, we’re going to talk about how National Insurances are calculated throughout the year. Now firstly, there's the idea that directors have what's called an annual earnings period. Now that means that HMRC checks your pay against yearly thresholds, not weekly or monthly, like regular employees.
::So, even if you are paid monthly, your Natural Insurance calculations and contributions are not worked out the same way as it would be for other employees. Now, this is a handy approach, by the way, if your pay is irregular, fluctuates throughout the year and it smooths out the National Insurance Contributions you've got to pay. There's less shock and more control.
::It's worth pointing out here, by the way, that directors are also not governed by minimum wage regulations. So, there will be months when you're not going to be paying yourself a great deal. There will be months when you're paying yourself a bit more. And directors, by the way, in this context is not just for private companies, it's also for CICs, not-for-profit companies.
::Directors are directors, are directors. Now, let's break this down a little bit more. We have two methods to choose from when processing the payroll and two ways to calculate director's National Assurance. Method number one is called the annual earnings method. This is the default calculation and it tends to be what most payroll people will choose.
::Method number two is the alternative method. That's a really crazy, different name or something called the regular earnings basis. Now in theory, they both lead to the same conclusion, the same total amount of National Insurance Contributions by the end of the tax year. But what you pay during the course of the year – that’s where the difference will lie.
::And what I want to do is to walk through each one. So let's firstly start with method number one, the annual earnings approach. Now this is the one HMRC uses unless you specify otherwise. And here's how it works. You tot up all your earnings so far on the tax year. You check how that compares to the annual National Insurance Contributions threshold, deduct any National Insurance Contributions already paid, and the difference is the National Insurance Contributions owed on your next pay slip.
::It sounds simple and it is once you get your head around it and get the hang of it. Let's say for example, you are a director. In April, you earn no salary. In July, you decided to take 25,000 pounds. Now no National Insurance Contributions are paid until your total earnings go over the threshold. Once you cross that line, National Insurance Contributions kick in.
::This suits directors who don't pay themselves a steady monthly wage, and it gives flexibility. Now, the example that I just quoted, in April - obviously no salary, no National Insurance Contributions. In July - cumulatively we've got 25,000. If you are a normal employee, you would only pay the National Insurance in the month that it arises.
::Here we look at a cumulative approach. Now, let's factor in the 25/26 thresholds, and when I say 25/26, I'm talking about between the period 6th of April, 2025 and the 5th of April, 2026. Now, in that, and there's a few numbers here to share folks, the primary threshold, and that's when employee National Insurance Contributions kick in, not the employer.
::That's 12,570 currently. Upper earnings limit, and that's the figure when National Insurance Contributions for the employee drops to 2%, that limit is 50,270 and those two figures, by the way, the 12,570 to 52,070 have been that for some years. Now, next we have what we call rates measured in percentage terms. The employee national assurance rate is 8%
::up to that 52,070. Obviously once it exceeds 12,570, anything over that, you pay a fixed 2%. Now let's consider the employer. Now, if you are the employer, your National Insurance Contribution now starts at the level of 5,000 pounds. The employer rate for National Insurance Contributions is 15%, and remember, if you don't qualify for it for employment allowance, employers National Insurance Contributions kick in above that 5,000 and you will have to pay that out.
::It's worth noting folks, check out the podcast listing here, and we've covered single director’s employment allowance and national insurance rules here, so it is worthwhile reminding yourself, checking that out for yourself. Now, method number two is called the alternative method. There's nothing like originality is there in names.
::Now this works just like a regular employee setup. Each month, you calculate National Insurance Contributions based on that pay slip alone, in isolation. You don't consider what historically has been. It's predictable. It's good for budgeting and it's helpful for cash flow. But, there's a twist. At the end of the year, you've got to do a better reconciliation.
::You've got to check what you've actually paid on that alternative method against what it would've been against the annual thresholds. If for any reason you've underpaid the National Insurance Contributions throughout the year, then your final payslip of the year must make up the difference. And if you find there's not enough pay in that final period, then you step forward as the employer, and you've got to cover that.
::HMRC does not want to be out of pocket. Now, when it comes to the alternative method, you've got to make a conscious choice to choose that. It's not automatic and your pay must follow a regular plan. So it's the same amount per week or the same amount per month. Now, decision time. We're now going to consider which method is best for you.
::So let's look at the pros and cons. Let's deal with the annual earnings method, first of all. Now this is great if your pay is irregular. Maybe your remuneration strategy is you take out a dividend and you take out one figure that'll represent your salary, a big salary. The National Insurance Contributions build more slowly, and that's useful for your cash flow and tax planning.
::The downside is that your deductions may be volatile or jump around and you get a big hit with National Insurance in one month. Under this method, you can have no National Insurance for, say the first 10 months of the year, get used to a steady wage packet, and suddenly it kicks in for the last couple of months of the year.
::Now, if we look at the alternative method, the upside, you've got predictable monthly costs - always good for budgeting and peace of mind. And being a big fan of planning and budgeting, that's going to be something that you can factor in. It's simpler for some payroll teams. It's the same calculation every month.
::Now we have many clients who have overseas employment. Employers are based overseas. In the UK, we're used to lots of different variety of payrolls, weekly, monthly, fortnightly. So we can handle that. Other people may not necessarily be able to. Anyway, let's get back to the podcast. Now, the downside is if you need to tidy things up at the end of the year. That could be unexpected costs
::if you haven't put money aside, if you're doing it yourself, it could quite easily slip through and you're going to have problems later on. Now, let's factor in some salary planning tips. Now, option one, you pay yourself that 5,000 pounds and for 25/26, you can legitimately pay yourself a salary as a director of 5,000 pounds.
::Remember, minimum wage regulations do not affect you as a director and you would avoid paying all tax on National Insurance Contributions. So let's break that down. The employee National Insurance Contribution start at 12,570, so nothing there. Employer NIC starts a five grand. Nothing there and the personal allowance is also 12,570.
::So if you do decide to pay yourself an annual salary of 5,000, you pay no income tax, no employee NICs, no employer NICs, and there's no impact and there's no need to worry about the employment allowance. Now before you rush off thinking, this sounds fantastic, Mahmood, there's a little bit of a caution here.
::A 5,000 pound salary does not qualify, does not count as a qualifying gear for your state pension. If you want full pension benefits, you need to top it up or consider other options and strategies. Again, this is a topic we've covered in previous podcasts, so check out the list of wonderful podcasts we've done, and it'll be in there. Now as an aside,
::before we look at the common mistakes to avoid, as a rule of thumb, under current legislation, you need 35 years of qualifying National Insurance to get the full maximum state pension. What we're going to now look at is common mistakes to avoid. So let's recap a few mistakes that we've come across ourselves.
::Paying the director a regular salary, but using the annual method without tracking the thresholds, forgetting to reconcile if you're using the alternative method, assuming that a 5,000-pound salary qualifies for state pension, it doesn't (it's a schoolboy error), missing out on planning opportunities that save both tax and NICs.
::Now, those mistakes can be avoided if you seek the right advice. Check out the show notes at the end, by the way, for a link to our contact us page, our link to our resources here, that's going to help you out. Yeah, let's imagine this scenario. You are a small consultancy business. You are the sole director. You don't take out monthly wages.
::Instead, you draw dividends and you've decided that it suits you to have one big salary payment at the end of the year. Now, in that case, the annual earnings method makes sense. Your accountant, your bookkeeper, your payroll person adds up your salary, works out the National Insurance Contributions that are due on the full year’s pay and handles it in one go.
::Let's look at the reverse side of that. You pay yourself 1200 pound a month. You like routine, you budget monthly. Then the alternative method is cleaner - monthly deductions, no surprises. You know what your take home pay is, and you're paying as you go along. But remember, make sure you do that reconciliation exercise in March.
::Otherwise, that door's going to get knocked and you know who's going to be at the door. It's going to be HMRC. Now, some final concluding thoughts. There is flexibility for National Insurance for directors, but that flexibility can potentially mean complexity. We all can save you thousands if you plan ahead.
::But remember, put the method that fits your pay pattern. Watch those thresholds. Use the 5,000 pound salary tip if it works for your situation and you're not concerned about state pension, or there are other ways that you're contributing to build that pension up. Plan early. Don't wait till March to do it.
::And above all, if you don't know, if you are unsure, don't do it yourself. Payroll can be a complex affair and mistakes are normally met by HMRC with fines, penalties, and the rest. Now, if you decide you want to plan your salary a bit more structured, dividends, tax efficiently, consider a remuneration strategy, then book a call with us today at I Hate Numbers. We help you plan it, do it in profit, and we want to make your life and tax as simple as possible.
::Thanks for listening. If you feel there's somebody you could benefit from this podcast, as always, I'd love it if you could share. Catch you next time, folks.