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  • Writer's pictureBrian Pusser

Getting Directors’ NI contributions right for 2023/24

National contributions holding money in hands
Getting National contributions right

The end of the tax year is just a few weeks away. As an employer, you must carry out the usual payroll year-end routines. However, if your business operates through a company, an extra step might be required. What is it?


NI earnings periods

Class 1 NI is usually calculated on the basis of earnings received within each standalone pay period (such as the week or month) without taking account of previous earnings. An exception applies to directors who, no matter how often they receive their pay, have an annual earnings period (AEP) which takes into account the cumulative earnings in the tax year. Make sure each director’s payroll record in your software has the “director” indicator checked.

AEP rules

Under the AEP rules, a director does not have to pay NI until their pay exceeds the primary earnings threshold (£12,570). Contributions are then due at the main rate until earnings reach £50,270 when the additional rate (2%) only is payable. As this makes for uneven NI deductions, there’s an alternative method that can be used. 

A director who is in post on 6 April will have an AEP even if they resign their directorship during the tax year. Conversely, if a director is appointed after 6 April, the NI annual thresholds are calculated pro rata.

What’s changed?

For earnings paid on or after 6 January 2024, the main rate has decreased to 10% from 12%. While this reduction is easy to implement for employees, for directors the application of an annualised rate of 11.5% will depend on the NI method chosen.

Normal calculation

For cumulative earnings falling between £12,570 and £50,270, use:

  • 12% for earnings to date in Months 1 to 9; and

  • 11.5% for earnings to date for Months 10 to 12.

Example. Alan is a director of Sugar Ltd, earning a monthly salary of £4,000. He starts paying NI in July when his earnings exceed £12,570. He receives a bonus of £10,270 in September. He pays NI at 12% on his cumulative earnings of over £12,570 until January when the rate of 11.5% is used. His NI liability is £4,495.50

Alternative method

To even up NI, the alternative method applies the normal employees’ NI rates to a monthly or weekly earnings period on a non-cumulative basis. At the tax year end, the NI on the director’s final salary payment is calculated by comparing the amount paid to date with the correct annual liability. If a director has left the business before the annualised rate can be applied, the employer has no legal obligation to recalculate the NI.

Example. If Sugar Ltd uses the alternative method, Alan is initially treated as having a monthly earnings period, paying NI on earnings between £1,048 and £4,189 at 12% up until Month 9, and at a rate of 10% from Month 10. March’s NI liability will be computed by comparing the amounts paid in Months 1 to 11 with the actual annual liability so that an amount of £492.64 is payable to bring the total NI for the year to the correct amount of £4,495.50. Whichever method is used, the NI liability for a director should be recalculated at the end of the tax year, even if no earnings have been paid to the director after 5 January 2024.


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