A company director’s Class 1 National Insurance is worked out on an annual earnings period, not on each weekly or monthly payment, under regulation 8 of the Social Security (Contributions) Regulations 2001. Payroll can either calculate cumulatively on pay to date (the standard method) or pay on account each period and square up at the final payment of the year (the alternative method). A director appointed part way through the year gets a pro rata annual earnings period running from the tax week of appointment.

Why are directors treated differently from other employees?

For most employees the earnings period is the pay interval, so a large bonus paid in one month uses only that month’s thresholds and the upper earnings limit for that month. Directors control the timing of their own pay, and without a special rule they could pay a low salary for eleven months and a large bonus in the twelfth, so that most of the bonus fell above the monthly upper earnings limit and attracted only 2%. Regulation 8 removes that advantage: where a person is a director at the start of a tax year, the earnings period is the whole year, whether or not they remain a director throughout. GOV.UK summarises the result simply: directors pay National Insurance on annual income from salary and bonuses over £12,570.

HMRC’s booklet CA44 says that, for National Insurance, regulation 1 of the 2001 Regulations defines a director as a member of a board or similar body managing the company, or the single person managing it, and also a person on whose instructions such a director is accustomed to act, unless those instructions are only professional advice. A director is an office holder, liable to Class 1 under section 2(1) of the Social Security Contributions and Benefits Act 1992.

What thresholds apply for 2026 to 2027?

The annual limits are the same as for other employees. From HMRC’s rates and thresholds for employers for 2026 to 2027:

  • lower earnings limit: £6,708;
  • secondary threshold (employer starts paying): £5,000;
  • primary threshold (director starts paying): £12,570;
  • upper earnings limit: £50,270.

Under category A the director pays 8% between the primary threshold and the upper earnings limit and 2% above it. The company pays 15% on everything above the secondary threshold. CA44 says earnings are not recorded for National Insurance until the total for the year reaches the lower earnings limit.

How does the standard annual earnings period method work?

Each time the director is paid, payroll works out National Insurance on total earnings paid so far in the tax year, including fees and bonuses, and deducts what has already been paid. The difference is what is due now. Nothing is deducted from the director until cumulative pay passes £12,570, and then contributions are taken in larger amounts later in the year. GOV.UK says this method is common for directors paid irregularly. The full payment submission shows AN in the director’s NIC calculation method field.

CA44 allows two calculation techniques: the exact percentage method, or adapting the weekly or monthly tables by averaging cumulative pay and multiplying back up. Only one technique can be used for a director in a tax year.

What is the alternative method, and who can use it?

Regulation 8(6) lets the director and the company pay on account as if the annual rules did not apply. CA44 says this is available if the director agrees, the director is normally paid in a regular pattern, and those payments normally exceed the lower earnings limit for the pay period. Payroll then uses ordinary weekly or monthly thresholds during the year. At the final payment of the tax year, or of the directorship, payroll must reassess on the annual basis and deduct any shortfall from that payment, with the company paying any balance the payment cannot cover. The submission shows AL.

Where a large bonus is paid mid year, CA44 permits reassessment on the annual basis at that point, to avoid an unexpectedly large deduction in March. The company must then use the annual rules for the rest of the year.

What happens when a director is appointed during the year?

A director first appointed during the tax year has a pro rata annual earnings period for the rest of the year. Under regulation 8(2) and CA44, the period runs from the tax week of appointment to the end of the year, using 52 weeks and ignoring week 53 (unless the appointment falls in week 53, when the period is one week). The thresholds are scaled as follows:

  • lower earnings limit: the weekly limit of £129 multiplied by the number of weeks;
  • every other threshold: the annual figure divided by 52, multiplied by the number of weeks and rounded up to the next whole pound.

CA44’s table gives the results. A director appointed in tax week 27 (5 to 11 October 2026) has 26 weeks, a pro rata lower earnings limit of £3,354, secondary threshold of £2,500, primary threshold of £6,285 and upper earnings limit of £25,135. Earnings paid before the appointment for earlier work as an employee are kept out of the director’s calculation, while earnings paid after appointment for that earlier work are included. The appointment itself is covered in appointing a director.

What if the director resigns or is reappointed?

Resigning does not change the earnings period. If the person stays on as an employee, GOV.UK says payroll should calculate on the whole tax year as if they were still a director and switch to the ordinary pay period basis from the next tax year. CA44 adds that a director who resigns and is reappointed by the same company in the same year keeps the original earnings period. Directorship earnings paid in a later tax year after the appointment has ended are assessed on their own, on an annual earnings period for the year of payment, under regulation 8(5).

Which payments count as a director’s earnings?

CA44 says all earnings count, including fees and bonuses. Points that catch people out:

  • Payments made in advance or in anticipation of fees or bonuses are earnings when paid.
  • Crediting a voted bonus to a director’s account with the company triggers National Insurance at that point; later drawings from an account in credit do not.
  • Drawing from an overdrawn account in anticipation of fees or bonuses is earnings. Drawing in anticipation of dividends is not, though Class 1A may arise. See director’s loan accounts.
  • Repayment of a loan the director made to the company, and a company pension, are not earnings.
  • Waiving a voted bonus after it has been voted does not remove National Insurance already due.

Dividends are outside Class 1 altogether, which is why salary versus dividends planning focuses on the annual thresholds.

Illustrations

Illustration only, 2026 to 2027 category A rates.

A director in post all year draws £800 a month and a £10,000 bonus in December, so annual pay is £19,600. On the annual basis the director pays (£19,600 minus £12,570) at 8%, which is £562.40, and the company pays (£19,600 minus £5,000) at 15%, which is £2,190. If payroll wrongly treated December as an ordinary month, the director would pay 8% on £3,141 (the £4,189 monthly upper limit minus the £1,048 monthly threshold) and 2% on the £6,611 above £4,189: £383.50 in all. The £178.90 shortfall is exactly what regulation 8 exists to prevent.

A director appointed in tax week 27 is paid £1,500 a month for six months, £9,000 in total. Using the pro rata limits the director pays (£9,000 minus £6,285) at 8%, which is £217.20, and the company pays (£9,000 minus £2,500) at 15%, which is £975. Using the full annual thresholds by mistake would show no employee contributions at all.

What are the common mistakes?

  • Leaving the payroll software on the ordinary employee setting, so no annual reassessment ever happens.
  • Applying full year thresholds to a director appointed mid year.
  • Forgetting that a director over State Pension age pays no employee contributions but the company still pays at the normal rate.
  • Assuming the Employment Allowance is available when a company’s only employee liable for employer contributions is its sole director. GOV.UK says that company cannot claim. See the Employment Allowance explained.
  • Paying contributions on account before the threshold is reached without the director’s agreement. CA44 says the company must refund them if annual pay ends up below the primary threshold.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.