Directors' NIC

There are two possible methods of calculating Director's NIC:

• Annual Basis

• Pro-Rata Basis (Alternate 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 Pro-Rata Basis (Alternate Basis), on the final payment in month 12, the entire NIC's are to be recalculated on total earnings in month 12 and a manual adjustment made in that remittance. HMRC guidelines state that this method can lead to disproportionate amounts of NIC being payable at year end.

BrightPay 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  £5,772

ST  £7,956

PT  £7,956

UAP  £40,040

UEL  £41,865

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  £111

ST  £153

PT  £153

UAP  £770

UEL  £805

Pro-Rata Basis

This method differs to the Annual Basis in that it assigns the periodic LEL, ET, UAP and UEL to each periodic 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  £111

ST  £153

PT  £153

UAP  £770

UEL  £805

This alternative method is only recommended when a Director's periodic salary will consistently exceed the equivalent periodic UEL in each 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.

Please refer to the HMRC guideline booklet CA44 for further information

Applying the Pro-Rata Basis in BrightPay

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

To apply the pro- rata basis, click Employee:

1) Select the Director from the employee listing

2) Within their record, select the Tax/ NICs heading

3) Under National Insurance, tick to indicate that the employee is a director

4) For Director's National Insurance, tick to 'Use alternate method for calculating director's NICs'

5) Click Save Changes