Typically Directors only account for a small percentage of a company's staffing numbers, but they require some special considerations when processing their payroll. These include: NI calculations, an annual check at end of tax year and making sure the earnings period is pro-rated to the time the person has been appointed as a director. These are just some of the points to consider.
NI calculations
For directors, their NI is based on cumulative earnings. Therefore, the way we calculate their NI deductions is different.
When a worker is highlighted as a director, this should be recorded on the payroll system (usually in the form of an indicator) and a code reported to HMRC on data item 84A of the full payment submission to state one of two options for how calculations are made (your payroll software should do this for you).
Annual calculations (AN) where the director’s NI liability is calculated on cumulative earnings, rather than a pay period by pay period basis. This could mean that a director goes without paying NI for several months until they hit the annual primary threshold (£12,570 for 2024/25 tax year).
Alternative arrangement (AL) where calculations follow the same method as other employees on the payroll.
Year end
It’s important to note that even if a business is operating the alternative method for directors’ NI contributions (NICs), an annual check must still take place at the end of the tax year. This acts as a reconciliation based on the annual threshold. When the final payroll of the year is prepared, you would need to amend the NI calculation method in your payroll software, to ensure an annual assessment is carried out.
Recommendations
There are several reasons why calculating NI in the same way as you do for employees is preferred. Some qualifying conditions to operate alternative arrangements are:
the director agrees to be processed like this
the individual receives steady monthly income, such as a salary
the payment pattern allows for a regular earnings period to be used
payments usually exceed the lower earnings limit (LEL) for NI purposes.
If a payroll is run regularly and the above conditions are met, some individuals may find it easier to pay NI in this way.
Changes in the year
As all payroll professionals know, situations for their workforce regularly change. When processing directors, it’s important to note that starts and ends of directorship are treated differently.
To guarantee compliance with any Director's payroll, please contact our specialist team on 0800 131 0 131 and sales@rollpay.co.uk
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