DMBM520590 - Debt and return pursuit: PAYE: in-year process: quantification: directors NIC
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The Employers Guide, CA44 (National Insurance for Company Directors, covers NIC for company directors in detail. You can also find general guidance on page 6 of CWG2, Employers Further Guide to PAYE & NICs.
For NIC purposes, directors of limited companies are classed as office holders and NIC is calculated using an annual earnings period. This applies regardless of how often the directors get paid.
Both the director and the employer have to pay Class 1 NICs. Both of these contributions are payable when the director's total earnings exceed the annual earnings threshold (AET). This would be the same as an employee's Earnings Threshold if it were worked out on an annual basis.
There are two ways of calculating directors NICs - Cumulative Method and Alternative Method. The company can use the NIC calculator (HMRC website) to reassess the National Insurance contributions for a company director using an Annual Earnings Period at the end of the financial year, or during the year, if the directorship ends. If the director is appointed part way through the year, the Annual Earnings Period check is calculated on a pro-rata basis from the week in which he or she was appointed.
The Cumulative Method
Each time a director is paid, the employer must
- work out the NICs due on the total earnings paid in the tax year to date
- subtract any NICs already paid.
By doing this, the contributions are calculated on a cumulative basis unlike other employees whose NICs are calculated on each payment.
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The Alternative Method
Under this method employers can choose to treat the director's earnings the same way as other employees, by using weekly or monthly tables throughout the year. To be able to use this method the director must be receiving regular payments from the employer.
At the end of the tax year the employer must do an end of year calculation for the whole annual earnings period. In order to calculate the correct NICs for the annual earnings period, the NICs paid must be re-assessed. This re-assessment must be recorded at month 12 on the P11 (or alternative) and the final payment to Banking Operations, must be adjusted accordingly.
The Annual Earnings Threshold details would then be shown correctly on the P11 at month 12.
Potential Problems
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