Directors' National Insurance: The Annual Earnings Period and the Alternative Method

Directors control when and how they are paid. To stop NI being reduced by timing salary and bonuses, the Social Security (Contributions) Regulations 2001 give directors an annual earnings period. HMRC explains the rules in booklet CA44.

The Employment Allowance (£10,500 for 2026/27) can cover employer NI, but not where a director is the only employee paid above the Secondary Threshold.

Each time you pay the director, payroll works out NI on their total pay for the tax year so far against the annual thresholds, then takes off the NI already paid.

In practice there is no employee NI until cumulative pay passes £12,570; after that, NI is taken from each payment until the year's total is reached. This suits directors paid irregularly or by one large payment.

You can calculate NI each pay period using the normal monthly or weekly thresholds, as for other employees, if:

• the director agrees
• they are paid in a regular pattern
• those payments normally exceed the Lower Earnings Limit for the period

At the last payment of the tax year, or when the directorship ends, payroll must recalculate on the annual basis and deduct any shortfall. If that payment cannot cover it, the company pays the balance. After a large mid-year bonus you can reassess at that point, but you must then use the annual rules for the rest of the year.

A director appointed during the tax year has a pro rata annual earnings period, so the thresholds are reduced to cover the weeks remaining from the week of appointment. When someone stops being a director, payments for work done while they were a director can still fall into the director's earnings period, so check CA44 before running the final payroll.

On the Full Payment Submission, enter AN or AL in the director's NIC calculation method field and complete the week of appointment.

• Setting the director up as an ordinary employee and never doing the year-end reassessment.
• Leaving the director flag off, so NI is worked out monthly only.
• Forgetting that a salary above £5,000 triggers 15% employer NI unless the Employment Allowance applies.
• Assuming dividends count for NI. They do not.

LimitedCompany.Accountants runs director payroll, sets an efficient salary and dividend mix and fixes past NI errors before HMRC raises them. Get a quote or book a call or ring 020 3441 1258.