NIM12001 – Class 1: Calculating Class 1 NICs for Directors: Introduction

The legislation on employed earners and Class 1 contributions applies to directors unless otherwise stated or specific administrative concessions apply.

Payments to a director are liable for Class 1 contributions because a directorship is an office (ESM2501 for offices generally and ESM4040 for directors) and therefore within the definition of “employed earner” in Section 2(1)(a) SSCBA 1992.

Normally payments to a director, for acting as a director, are earnings for Class 1 but there are exceptions. These are where the conditions of regulation 27 SSCR 2001 are satisfied for certain payments to professional people and to nominee directors ( NIM12004). There is also an administrative concession where a non-resident director only attends board meetings in Great Britain & Northern Ireland ( NIM12013).

Directors can also be shareholders in their companies so payments to them can be in that capacity rather than as directors ( NIM12012). Particular care needs to be exercised when considering whether payments to directors are advance payments of earnings under regulation 22 SSCR 2001 ( NIM12014).

Unlike other employed earners, the earnings period of a director, as defined in the legislation, is normally the year in which the earnings are paid (regulation 8 SSCR 2001) ( NIM12021). An earnings period for a director is therefore commonly designated an “annual” earnings period (AEP) although it is not a term used in the legislation. Without the legislation, which was introduced from 6 April 1983, a director could be voted the whole of his or her remuneration in one week of the tax year and avoid most of his or her Class 1 primary liability because of the weekly or monthly Upper Earnings Limit (‘UEL’).