Directors and National Insurance

Directors are classed as employees and are required to pay National Insurance on their annual income from salary and bonuses that exceed the Primary Threshold. For the 2024-25 tax year, this annual threshold is set at £12,570.

Many director shareholders opt to take a minimum salary and receive the remainder of their remuneration as dividends. This approach can reduce National Insurance Contributions (NICs) and, in some cases, income tax. The common strategy is to set the salary at a level that qualifies the director for state benefits, including the State Pension, without necessitating the payment of any NICs.

National Insurance for Directors

A director’s liability to National Insurance is calculated based on their annual (or pro-rata annual) earnings. This differs from regular employees, whose NIC liability is typically calculated based on their actual pay periods, usually weekly or monthly. Payments on account of a director’s NICs can be made in a similar manner to those of regular employees. However, an annual adjustment must be made at the end of the tax year.

Pro Rata Annual Earnings for Newly Appointed Directors

Directors who are appointed during a tax year are only entitled to a pro-rata annual earnings band. This is dependent on the actual date of appointment and the amount of time remaining in the tax year. Care must be taken in these situations to avoid an unexpected liability to pay NIC.

Considerations for Tax/NIC Efficient Salary Setting

Several considerations must be taken into account when determining the most tax—and NIC-efficient salary for directors. Ensuring that the salary is set at an optimal level can result in significant savings and benefits.

Proper planning and understanding of National Insurance obligations are crucial for directors. By strategically setting salaries and understanding the rules around NICs, directors can maximise their benefits while minimising their tax and NIC liabilities.