Directors' National Insurance

There are two possible methods of calculation. The different methods affect how much NI the director pays during the tax year. Regardless of the method, they’ll still pay the same amount of NI by the end of the year. Some directors might prefer getting paid using one method to the other. It’s important that you understand how each method calculates:

Calculate NI cumulatively. Also known as the standard method. This is most common for directors who aren't paid on a regular basis

Calculate NI per pay run. Also known as the alternative method. Most common for directors paid on a regular basis

Directors must end the tax year or their employment on the Cumulative method. This is regardless of how they received pay during the tax year.

NOTE: When Directorships start part-way through the tax year, the cumulative method applies. It applies until the end of the tax year, even if you choose the per-pay run method for the director.

Calculate NI cumulatively >

This method calculates the director’s NI liability on a year-to-date basis in each pay run. It uses the annual earnings thresholds.

This means the director can earn up to the annual Primary Threshold (PT) before they begin to pay NI. It ensures the director is up to date with their NI contributions when the current pay run is complete.

HMRC Guidance for PAYE and National Insurance contributions (opens in a new window)

In each pay run, the director’s total NI liability for the year calculates based on their earnings to date. The amount of NI paid to date in NI subtracts from the total NI liability. This determines the amount they must pay in the current pay run.

Pro rata cumulative method

This is a special case of the calculate NI cumulatively method.

An existing employee may become a director part-way through the tax year. Or a director may join the company as a new employee part-way through the tax year.

In either case, the new director will have their NI liability calculated on a pro-rata basis. This bases the earnings thresholds on the amount of time remaining in the tax year.

Read the HMRC booklet. National Insurance for company directors (opens in a new tab). These start on the week in which the directorship began in the tax year, even when you pay the director monthly.

The HMRC Directors NI calculator will work out the pro-rate amount for you.

Work out Director's national insurance contributions (opens in new tab).

Example of how pro-rata thresholds calculate

This example uses the 2023/2024 NI thresholds. GOV.UK has the latest guidance. Read their latest article Rates and thresholds for employers 2023 to 2024 (opens in a new window).

Charlie joins the company as a director on 19 June. This is in week 11 of the tax year. This means that they are a director for 42 weeks of the tax year, from week 11 until week 52.

Their pro-rata PT calculates as follows:

Pro-rata PT = (annual PT / 52) * weeks remaining in the tax year

The value rounds up to the nearest pound, if necessary.

In this example, this means that:

Pro-rata PT = (£12,570 / 52) * 42) = £10,153

Charlie becomes liable for NI when their earnings to date in this tax year exceed £10,153.

The HMRC Directors NI calculator will work out the pro-rate amount for you.

Work out Director's national insurance contributions (opens in new tab).

Calculate NI per pay run >

This method calculates the director’s NI liability on a weekly or monthly basis in each pay run. It does this using weekly or monthly earnings thresholds.

The director’s NI contributions calculate in the same way as a standard employee until the end of the tax year. At the end of the tax year, the final pay run includes a recalculation. The system bases the recalculation on their cumulative earnings for the year. Their NI may be higher or lower in that period as a result.

NOTE: When Directorships start part-way through the tax year, the cumulative method applies. It applies until the end of the tax year, even if you choose the per-pay run method for the director.

In this situation, the system uses the per pay run calculation method from the beginning of the next tax year.

This method gives an average NI liability, rather than the director’s exact NI liability for the year. A balancing calculation takes place at an appropriate time.

This calculation compares year-to-date earnings to the annual or pro-rata annual NI thresholds.

It makes any necessary adjustments to the director’s NI liability.

Generally, the balancing calculation occurs in one of the following circumstances:

The final pay run of the tax year, which may be an extra pay run. This occurs even if you process holidays at year end.
The director’s circumstances change. For example, if their NI category changes.

You need to recalculate the previous pay run using the cumulative calculation method.

Select the director in the Edit Pay stage of a pay run. Select Calculate NI Cumulatively from the Preferred calc method drop-down.

After you pay a bonus. If the bonus is large enough it might otherwise mean an excessive NI correction at the end of the year.

HMRC recommends changing to the cumulative calculation method in this scenario.

NOTE: The balancing calculation may occur part-way through the tax year. You need to calculate the director’s NI using the cumulative calculation method for the rest of the year.

You may need to go back to a previous pay run and change the directors’ NI calculation method.

This can lead to all previous pay runs in the tax year recalculating.

Example:

Your employee, Alex, started directorship in week 5, and processed using the cumulative NI calculation method.

It emerges that their directorship started in the previous tax year.

You edit week 5 and change the directorship start date. You also change the NI calculation method to calculate NI per pay run.

This recalculates week 5, applying the new calculation method. It also recalculates weeks 1 to 4. It treats the employee as a director, using the calculate NI per pay run calculation method.

If you need help to edit a completed pay run, read our correct a completed pay run article.

To change the calculation method

Select the Pay Runs tab, then Process Pay Run.
Click through to the Pay section.
Select the director’s name above the Payments section.
Change the Directorship Started details, if necessary.
Select the required calculation option from the Preferred calc method drop-down.
Select Save, then finish processing as normal.

The pay run recalculates based on the new details moving forward. Previous pay runs may also recalculate. This depends on which calculation method you are changing to.

You may change from a Cumulative calculation method to a Pay-by-Pay calculation method. The Sage Payroll system will re-calculate the previous periods with these changes. This creates a correction line in the next processing period.