The standard method for calculating Directors National Insurance Contributions is that the contributions are calculated annually – this means NIC’s only become due once a directors earnings exceed the primary threshold for a tax year (£12,570 for 2023/24).

This differs from the calculation used for regular employees, where NI is calculated on a cumulative basis. If you are a director, you can however (before the start of a tax year), elect for your NI to be calculated using the ‘alternative’ method for Directors, which is the same method used for calculating NI for employees.

Whichever method is chosen, both the employee and employers NIC will calculate the same over the tax year, however the difference is that if the ‘alternative’ method is chosen, NIC’s will be calculated on pay per pay period, rather than on an annual basis. This will lead to you paying NI more evenly throughout the year, rather than having no NI until you reach the threshold.

This will allow for more planning and budgeting through the year, as your net pay will remain roughly the same every month, rather than a sudden change several months into the year as a result of the National Insurance threshold being reached.

So which method is best for me?

As a general rule, if directors are paid irregularly (for example, those on annual payroll runs), the standard method is used, however for directors who are paid regularly, the alternative method is considered more beneficial.

Our Tax and Payroll experts at Tree will be undertaking our annual review of clients payroll in the coming weeks to ensure levels of directors salary remain at the most optimum level, however we will also be assessing the methods of directors NI, and if we feel that it will be beneficial for you to change the current method you are using, we will be in touch.

As always, if you have any questions regarding the above, or regarding payroll in general, please get in touch with the office.