Directors and National Insurance

May 2007

Many directors will have noticed that their take home pay has dropped in April 2007 as compared to the previous 9 months. This is particularly so for directors whose pre-tax salary is the same each month, and who earn substantial salaries.

Why is this?

Directors are subject to the so-called Annual Earnings Period for National Insurance purposes. The effect of this rule is that the directors personal contributions, in the first 3 months or so of the tax year, will cover the majority of his or her contributions for the entire tax year.

If, for instance, a director's monthly gross salary was £12,000, 75% of National Insurance deductions i.e. £3,239 will have been made in the April - June 2007 period. After this initial charge the monthly employees contributions would drop to just £120 per month!

If the gross monthly salary is a more modest amount say £1,000 per month, there would be no employees deductions for most of the year, any liability would only arise in the final few months.

Overall a director pays no more National Insurance than a colleague paid at the same rate who is not a director. Directors, it seems, need to adjust to the lower take home pay in the first or last quarter of each tax year - dependent on the amount of their monthly salary.

There is a possible remedy which would allow contributions to be spread equally over the year. However this remedy may create an underpayment at the end of a tax year!

If directors would like us to review their earnings for NIC contribution purposes please call.