If an employee starts or stops a directorship, the way you work out their National Insurance contributions (NICs) will differ from that for your other employees. This is because directors' NICs are calculated on the basis of an annual earnings period, rather than the normal payment intervals (usually weekly or monthly) used for other employees.
Note, however, that PAYE (Pay As You Earn) tax is still deducted in the same way for directors as it is for any other employee.
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In the same way as for other employees, directors' NICs can be worked out using either the exact percentage method or using National Insurance tables.
The standard way of calculating directors' NICs involves taking the following steps each time you pay the director:
This allows you to calculate a director's NICs on a payment-by-payment basis in the same way as you would for any other employee. However, the earnings period remains an annual one, and so these deductions should be considered as 'payments in advance' of the director's annual liability.
This means that at the end of the tax year (or when the directorship ends) you will have to assess the director's total earnings for the year and adjust your final NICs calculation to ensure that the correct overall amount for the year will have been deducted.
The P11 Calculator is part of the Basic PAYE Tools package which you can download from the Business Link website. It makes it easy to start or stop deducting directors' NICs, but is only appropriate if you are using the exact percentage method to work out the NICs.
You need to amend the employee's details on the Employee Database to show that they have become or ceased to be a director. If they have become a director you then need to select either the standard method or alternative method outlined above. Once these details have been updated, the correct deductions will be calculated automatically.
Note that the P11 Calculator cannot currently conveniently process all in-year changes to directors' NI category letters.
Download Basic PAYE Tools (Opens new window) from the Business Link website
If you have been using the alternative method to calculate a director's NICs, you can use HMRC's 'Annual Earnings Period check' (part of the Basic PAYE Tools package). This will calculate the NICs due at the end of the tax year or when a directorship ends.
You need to put in the date the directorship started, as well as the total earnings and NICs paid so far in the year. The correct deductions will then be calculated automatically.
You can download HMRC’s PAYE Basic Tools using the link below..
Download Basic PAYE Tools from the Business Link website (Opens new window)
