How to de-complicate director NIC calculations

28th Apr 2021
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Director payroll is a fairly simple process, and many would agree that taking the NIC from company directors is the most complex component. Frustration and human error in calculating director payroll can be removed by ensuring you understand the methods, and embracing technology to automate these calculations.

There are two methods that can be used to work out a director’s class 1 NIC: the annual earnings period basis and the alternative basis. Regardless of which method is used, the director will pay the same amount of NIC, but the pattern of deductions will differ throughout the tax year.

Annual earnings basis

This method is common for directors who are paid irregularly. Each time a director is paid, their National Insurance for their total pay over the tax year so far, including bonuses, has to be calculated. Contributions owed then have to be taken off of the total employee National insurance they’ve paid so far.

A result of this method is that deductions may vary considerably, even though gross salary payments are constant.

Alternative basis

This method is more commonly used for directors that are paid a salary more regularly. This also allows contributions to be deducted more evenly throughout the year. Using this method, accountants must do an annual re-calculation to ensure that any contributions still owing are deducted from the final payment, or that there hasn’t been an overpayment.

Common issues with NIC deductions

Each tax year, the amount of National Insurance due depending on salary may vary, so accountants must ensure their software is up to date and HMRC compliant. Using a cloud-based payroll software can help with this as updates are made in real time and no software downloads are required, like in desktop-based systems. As relayed in this article, the process of calculating National Insurance owed is complex, and should be calculated using a reliable payroll software to avoid human error. 

When people join as directors of a limited company part way through the year, this means their accountant will have to pro rata the annual thresholds. Finding a reliable automated system that will automate these complexities to avoid human error is a key solution for this. If a director leaves part way through the year, if on the alternative basis, the calculation needs to switch to be performed on an annual but pro rata basis. Some software providers don't do this automatically.

What to report to HMRC

Directors’ pay and deductions should be reported to HMRC in the FPS. The director’s NIC calculation method should also be indicated on the FPS. To avoid the extra effort of having to remember to report FPS submissions after each pay period, and the manual intervention involved in sending off reports, find a system that will automate these submissions.

HMRC compliant National Insurance calculator

Director Pays is a cloud-based payroll system for accountants and payroll bureaux that is designed specifically to remove the manual efforts involved with director payroll processing. With a one-off set up, accounting firms can automate pay schedules, tax and NI calculations, HMRC submissions including FPS and EPS, client reporting, and journal entries to accounting platforms. No manual intervention will be required by the accountant for the entire tax year.

Director Pays applies the relevant NI calculation method to work out National Insurance due. Set up your director clients on the standard annual earnings method, or the alternative method, and never do a manual calculation again for the rest of the tax year.

Try Director Pays free for 14 days

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