How are NICs calculated for a director who is joining the company mid-year?

(The following FAQ was issued a few weeks ago but contained some inaccuracies. We are therefore reproducing this corrected version.)

The calculation of primary and secondary Class 1 NICs for company directors is the same as for employees in general, except that an annual earnings period is used. The effect on the director of applying an annual earnings period is that

• no primary NICs are due until the director's earnings in the year to date reach the annual earnings threshold (£5,435 for 2008/09),
  
  
• primary NICs are then due at the appropriate rate on all earnings up to the annual upper earnings limits (£40,040 for 2008/09), and
  
  
• primary NICs are then due at 1% on earnings above the upper earnings limit.

The same kind of calculation is used where

• an employee is appointed as a director for the same company during a tax year, or
  
  
• a new director takes office in a company during a tax year.

However, instead of using an annual earnings period, a "pro-rata" annual earnings period is used to calculate NICs for the remainder of the tax year. This involves recalculating the annual values of the LEL and the UEL so that they relate to the number of tax weeks between the date on which the directorship starts and the end of the tax year.

When determining the number of tax weeks in the pro-rata period to the end of the tax year, the tax week in which the directorship began is counted as one of those weeks. If there are 53 weeks in a tax year, only 52 weeks are taken into account unless the director starts in week 53, in which case there is one week in the pro-rata period. (So if a director starts in week 52 or week 53, there is one week in the pro-rata period in each case.) A "ready-reckoner" is provided at the back of HMRC's booklet CA44 National Insurance for Company Directors.

If an employee becomes a director with the same employer mid-year, the NICs that have been calculated before appointment to director are not included with the earnings paid subsequently. Only earnings paid after appointment are assessed under the pro-rata annual earnings period. Of course, the earlier NICs are merged with the NICs as a director when they are reported on the director's P14 Summary at the year end.

Example: If the directorship begins on 8 September, in tax week 23, there are 30 tax weeks remaining in the year including the tax week in which 8 September falls. The ET is converted to a pro-rata annual amount by dividing the annual rate by 52, multiplying it by 30, and , if necessary, rounding up the next whole pound (i.e. £5,435 for 52 weeks becomes £3,136 for 30 weeks). The UEL is converted to a pro-rata annual amount by multiplying the weekly rate by 30 (i.e. £770 per week becomes £23,100 for 30 weeks). Therefore, this director will start to pay main primary NICs when total earnings since appointment as a director reach £3,136 and will stop when they reach £23,100. Additional primary NICs continue to be paid on earnings above £23,100.

There is no reason why the concessionary arrangement of calculating NICs using a weekly or monthly earnings period should not be used instead of the pro-rata annual earnings period if

• the director has consented to the employer using this method, and
  
  
• by the end of the year, the NICs collected are as least as much as they would have been if the pro-rata annual earnings period had been used.

The following Table compares the pro-rata annual earnings period method and the alternative method, showing the NICs payable for a director who is paid £3,000 per month for the first four months of the tax year, and £5,000 per month from month 5. The appointment to director was from 1 August. As that date falls in tax week 17, that week and the following weeks give a pro-rata annual earnings period of 36 weeks. (The calculations use NI category A, the NI rates for 2008/09, and the exact method of calculating NICs)


*NICs for Month 12 calculated using Pro-rata Annual Earnings Period

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