All directors, regardless of their actual pay frequency, have an annual earnings period. This means that the class 1 contributions for the year are calculated by reference to the annual National Insurance Contribution (NIC) thresholds, rather than by reference to those for the pay interval.
There are two methods that can be used to work out a director’s class 1 NIC: the annual earnings period basis (also known as the default method) or the alternative basis. The result is the same: the director and employer will pay the same amount of NIC regardless of the method used, but the pattern of deductions will differ.
Method 1: Annual earnings basis or Default Method
Under this method, national insurance contributions are calculated on a cumulative basis by reference to the annual rates and threshold. Therefore, no employee contributions are due until the annual primary threshold is reached, contributions are then payable at 12% until the annual upper earnings limit is reached. Thereafter contributions are payable at 2%.
Method 2: Alternative basis
One of the effects of using the annual rates and thresholds is that deductions can vary considerably, even though gross salary payments are constant.
To allow contributions to be deducted more evenly throughout the year, the director can elect to use the alternative arrangements. These allow the director’s NIC to be calculated by reference to the thresholds for the pay interval, as for other employees.
A recalculation is performed at the time of the last payment using the annual thresholds, and any contributions still owing are deducted from the final payment. If the final payment is insufficient to cover the primary contributions due, these must be paid by the employer.
So, going back to the original question, I would say that you are having your National Insurance calculated on the Annual earnings basis or Default Method. This means no NI will be payable by yourself until your cumulative year-to-date salary reaches the annual primary threshold currently £8,632 in 2019/20.
We can help you work out what is best method for you, so please pop along today or give us a call on 0800 0523 555.
By Samantha Skyring FCCA
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