As a company director, your Director’s National Insurance Contributions work slightly differently compared to regular employees.
What is Director’s National Insurance?
The National Insurance system requires individuals to make contributions to qualify for benefits like the State Pension. Directors, like other employees, must pay National Insurance on their salary and bonuses. However, because directors often receive irregular payments, HMRC offers different methods for calculating these contributions.
Who is Classed as a Company Director?
For National Insurance purposes, a company director is:
- A member of a board or similar body managing the company.
- An individual managing a company alone.
If a director follows another person’s instructions, HMRC may also classify that person as a director, unless they are providing professional advice, such as a solicitor.
Most company directors must pay Class 1 National Insurance, just like employees.
How is National Insurance Calculated for Directors?
You can choose the method which calculates your Directors’ National Insurance:
1. The Cumulative (Annual Earnings) Method
The system calculates National Insurance based on total earnings over the tax year. Individuals pay contributions only when their earnings exceed the annual threshold of £12,570 for the 2024/25 tax year. The rate is 8% on earnings up to £50,270 and 2% on anything above. This method suits directors who receive irregular payments or lump sums.
2. The Alternative (Pep Pay Run) Method
The system calculates National Insurance for each payroll period; whether weekly, monthly or quarterly. Employers deduct contributions just like regular employee payments. At the end of the tax year, the system makes adjustments to ensure individuals have paid the correct total National Insurance.
Regardless of the method, the total contributions paid by the end of the year remain the same.
Choosing the Right Method
Directors can choose the method that best suits their payment structure:
- If paid irregularly, the Cumulative Method may be more suitable.
- If paid consistently, the Alternative Method may be easier to manage.
The chosen method applies for the entire tax year unless the director resigns. Switching between methods mid-year depends on payroll software capabilities.
Reporting and Paying Contributions
What to Report to HMRC
Every time they process payroll, employers must submit details to HMRC through a Full Payment Submission (FPS). This includes:
- Directors’ salary and deductions
- The chosen calculation method:;
- “AN” for the Cumulative Method
- “AL” for the Alternative Method
- The week the director was appointed
When to Pay Contributions
Even though the system calculates National Insurance annually for directors, employers must still make payments after each payroll run. Employers can process these payments weekly, monthly or quarterly, depending on the company’s payroll schedule.
What Happens When a Director Leaves
When a director resigns, employers must:
- Remove the “Director’s National Insurance Contributions method” entry in the FPS
- Use payroll software to calculate the final National Insurance owed
- Deduct any outstanding contributions from the final payment
If the director remains an employee, they switch to standard employee National Insurance calculations in the next tax year.
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The information provided in this article is intended for general guidance and informational purposes only. While we strive to ensure accuracy and keep content up to date, tax laws and regulations may change.