So here we are again, the end of another UK tax year!
At PAYadvice.UK we are seeing a high number of directors National Insurance Contributions questions and challenges!
So what is going on in March 2024?
Directors annual period
Directors are classed as employees and pay National Insurance on annual income from salary and bonuses over £12,570. Their nI contributions are worked out from their annual earnings rather than from what they earn in each pay period.
The annual method was introduced many years ago to prevent directors avoiding NIC contributions by under inflating income for the majority of the tax year periods and paying themselves large single amounts, thus taking advantage of the periodic operation of the Upper Earnings Limit.
Many years ago it was possible to pay a regular amount at around the Lower Earnings Limit (LEL), these days the Primary Threshold could be the equivalent, and then pay a significant amount that far exceeded the UEL for one week. Hence the annual method.
The problem with the annual method
The annual method required a cumulative calculation based on the annual bands and thresholds. This often resulted in no NI contributions due for the start of the tax year, then all being subject to the full standard rate (currently 11.5% blended rate for the 2023/2024 tax year), and then periods of only a 2% charge on earnings above the annual UEL
The bounce in contributions from nothing to loads to a small amount is often not liked.
For sometime now a concession temporary calculation has been allowed to smooth the NIC collection for directors who met qualifying conditions.
So there are two methods of calculation that are allowed to be operated for directors.
- Standard annual earnings period method
- Alternative method
Directors NI Alternative method and the end of the tax year
The Alternate method is increasingly popular for directors who are paid regularly.
- Each time you pay a director, their National Insurance is worked out similar to employees only on their pay for that period, including bonuses.
- However, in the last pay period (or when the director leaves) at the end of the tax year, an annual basis reassessment of the full year is required to work out whether more or less employee National Insurance is due and deduct or refund it from their last payment.
This is where the questions and challenges arise as some directors receive a shock NI bill or an unexpected refund.
So in the last payment of the tax year or end of employment the annual method is required.
Standard annual earnings period method
This method is common for directors who are paid irregularly and used to be compulsory for all directors. It is also required to be operated for the last payment in the tax year where the alternate method has been used.
So:
- Each time you pay a director (or the last payment in the tax year for those on the alternate method), NI is worked out on work out their total pay over the tax year so far, including bonuses.
- To work out what contributions they now owe, take off the total employee National Insurance they’ve previously paid so far this year.
Mid-year director appointments
Another angle where the March payment may seem unusual is for mid year start of directorship where the alternate method has been used.
The LEL, Primary Threshold (PT), Secondary Threshold (ST), various Upper Accrual Points (UAP) and the UEL are proportioned by the tax week of appointment proportion until week 52 (yes even for those monthly paid).
So although the period bands may be 1/12th (or 1/52th etc.) of the annual using the alternate method, at the annual reconciliation the bands may not be based on the full annual for the recalculation required.
So March can be strange for some directors
So with the annual recalculations required in March, for directors who have had in year fluctuations, the balancing calculations may bring a higher or lower NI liability surprise.
For one example the director turned state pension age mid year. So each month appropriately applied. However letter A priority will be before letter C. So periods where earnings above the UEL attracted an 11.5% contribution may fall into the earning up to the annual LEL resulting in a refund, is this correct? Absolutely.
In another example the director received a substantial Christmas bonus, most subject to 2% NI in December. However, the standard monthly payment was between the PT and UEL. For the annual recalculation, all of the bonus was then liable to the 11.5% standard directors annual rate.
December Bonus above UEL is £17,000 @2% = £340
Bonus £17,000 @11.5% = £1,955
NIC underpayment on annual basis
£1,955 – £340 = £1,615 extra NI in March
The other aspect to remember is that for April through December, the standard employee rate was 12%, this reduced to 10% from 6th January 2024. For directors, the blended rate of 11.5% applies to the whole of tax year 2023/2024. It then drops to 8% from 6th April 2024.
Directors, Real Time Information (RTI) and the Full Payment Submission (FPS)
So how does HMRC know they are a director and which method is being used?
On the FPS to HMRC your payroll software will indicate the individual is a director and which calculation method is being used as data item 84A, whether:
- AN for the annual method including mid year appointments
- AL for those where the alternate method has been used
More information on directors NI
The following resources are available from HMRC at Gov.UK:
PAYadvice.UK 20/3/2024