Directors NIC

There are two possible methods of calculating Directors NIC;

• Annual Basis

• Pro Rata Basis

The HMRC guidelines to calculating NIC for Directors advises that the Annual Basis is the preferred method, stating;

• calculate NIC's on the total earnings paid to the director each time a payment is made
• deduct the NIC's already paid, if any, to arrive at the amount of NIC's now due

Under the alternative basis on the final payment in month 12 the entire NIC's would have to be recalculated on total earnings in month 12 and a manual adjustment made in that remittance. 

The HMRC NIC manual does state that this method can lead to disproportionate amounts of NIC being payable at year end.

Bright Pay facilitates both of these calculation methods.  The user desired method of calculating NI must be indicated at the first pay period for the Director and cannot be changed thereafter.

ANNUAL BASIS

The HMRC preferred NIC method of calculation, i.e. Annual Basis, will apply to the NI calculation for the Director by default.

The Annual Basis assigns the NI thresholds of LEL, ST, PT, UAP and UEL all on an annual/cumulative basis.

This means that in week one the thresholds assigned to the calculation of the NI for that week will be;

            LEL                  £  5,304

            ST                    £  7,072

            PT                    £  7,225

            UAP                 £40,040

            UEL                 £42,475

The annual thresholds are assigned in total and the NI is calculated on a constant cumulative basis.

This method differs to the normal calculation of NI for a non-director employee which, in week one, would only assign the weekly thresholds of;

            LEL                  £102

            ST                    £136

            PT                    £139

            UAP                 £770

            UEL                 £817

PRO-RATA BASIS

This method differs to the Annual Basis in that it assigns the periodical LEL, ET, UAP and UEL to each periodical wage/salary in the same manner as the NI calculation for a non-Director employee.  Therefore on a weekly basis the alternative basis would assign the following thresholds;

            LEL                  £102

            ST                    £136

            PT                    £139

            UAP                 £770

            UEL                 £817

This Alternative method is only recommended when a Directors periodic salary will consistently exceed the weekly/monthly UEL in each weekly/monthly pay period AND ONLY where the Director will be paid for the entire tax year as a Director.

Due to the different application of the NI thresholds under both Director NI calculations it is not possible to switch between the two calculation methods during the tax year.

Refer to the HMRC guideline booklet CA44 for further information

APPLYING THE PRO-RATA BASIS

By default the payroll system will automatically apply the Annual basis for NIC calculation for Directors, as this is the prefer method of collection by HMRC. The pro-rata version is only recommended when a Directors periodic salary will consistently exceed the weekly/monthly UEL in each weekly/monthly pay period AND ONLY where the Director will be paid for the entire tax year as a Director.

To apply the pro- rata basic click Employee > Tax / NIC’s > Use alternate method.

1)    Select the Employee
        To apply the alternate method of calculating the NIC’s for the director select the employee in question
        from the employee menu.

2)    Tax/ NICs
        Once the Director has been selected, click on the Tax/ NICs tab

3)    Directors National Insurance
        Under the National insurance section, tick the box to Use alternate method for calculating directors NICs

4)   Save Changes
       Once ticked, click the save changes button. The system will now apply the pro-rata/ alternate method when 
       calculating NICs for the Director.