Directors National Insurance
Once an employee is created in payroll, you would need to specify if they are a director along with their appointed start date.
In QuickBooks Online Payroll, we support the annual/cumulative & alternative method (also known as per period) for directors.
Which method should I use?
The annual method is best for those directors who are paid irregularly or have irregular payment values. The year to date (cumulative) values are used in the calculation. If you pay the director the same value month in month out but pay a large bonus once to twice a year, it is best to use the annual method.
The alternative method is best for those directors who are paid same amount month in month out. This method only calculates the NI due on the period paid, BUT at the end of the tax year the annualisation calculation does take place. If you use this method and have paid a large bonus during the year, at the end of the tax year when the annualisation calculation occurs then potentially there will be a large NI amount for both the employee (director) and the employer.
How it is calculated?
The annual calculation method calculates the national insurance liability when processing each payroll run and is based on the employee's NI'able pay to date using the annual thresholds which are used no matter the pay frequency used on the payroll.
The annual calculation method ensures that the director is up to date with their National Insurance contributions when the payroll run is completed.
The director can earn up to the annual primary threshold before they start paying national insurance contributions.
Proration of Directors National Insurance (Annual method):
The Directors Appointment Date will determine the earnings threshold to be used when calculating the director's national insurance contributions
Alternative - How is it calculated?
Under the alternative method the directors NI contributions are calculated on a per period, the same way as a standard employee would be calculated, until the end of the tax year. At the end of the tax year, the final pay run includes a re-calculation based on the director's cumulative national insurance earnings for the year. This may mean that the directors contributions may be higher or lower than their final payment.
Frequently Asked Questions
How will HMRC know what calculation my director is on?
- The FPS will report the method ( data item #84A)
- AN if you are using annual method
- AL for alternative method
I have run my payroll but I want to change the calculation from annual to alternative? How can I go about this change?
If you have run and submitted payroll, you will need to delete the previous pay runs & then you can edit the employee profile and change the director calculation to alternative.
I have run my payroll but I want to change the calculation from alternative to annual? How can I go about this change?
If you have run and submitted payroll with the director until the alternative method you can change to annualised by going to the employee profile and selecting the annual method. Note: You can only do this once in a tax year and you will not be able to switch back to the alternative method
What happens if my director ceases directorship mid year?
The calculation will remain as selected. The instructions from HMRC is that for the remainder of the tax year the employee is still calculated as a director. If the annual method is selected this calculation will continue for the remainder of the tax year. Similarly if the employee is on the alternative method they will continue until the end of the tax year when the annualisation calculation will occur. You cannot remove the appointed date once it as been saved.
I migrated to QuickBooks Online Payroll and my employee is a director that has 2 NI letters during the year.
Unfortunately QuickBooks Online Payroll does not currently support this. We only allow support of entry of one NI letter in the Pay History section of the employee profile.
I entered my employee as a director by mistake - can I remove it?
No unfortunately not. You can delete any previous pay runs & then edit the employee details. You need to select as a director and deselect as a director and remove the sate to remove the information that they are a director.
If you require more information please visit: National Insurance for company directors