In the UK, directors are categorised as employees and are subject to National Insurance (NI) contributions on their annual income, including salary and bonuses, that exceeds the Primary Threshold. For the current 2023-24 tax year, the annual threshold is set at £12,570.
Many directors who are also shareholders opt to receive a minimum salary and distribute the remaining remuneration as dividends. This approach often leads to a reduction in National Insurance Contributions (NICs) and, in certain cases, income tax. The strategy behind this planning is to pay a salary that qualifies the director for state benefits, such as the State Pension, without incurring any NICs.
The calculation of a director’s NI liability is based on their annual earnings or a pro-rata annual amount. This differs from regular employees, whose liability is typically calculated based on their specific pay period, such as weekly or monthly. Similar to employees, directors can make payments on account for their NICs. However, an annual adjustment is necessary at the end of the tax year.
It is important to note that directors appointed during a tax year are entitled only to a pro-rata annual earnings band, which depends on the actual appointment date and the remaining time in the tax year. Caution must be exercised in these situations to avoid unexpected liabilities for NIC payments.
Setting the most tax and NIC-efficient salary/dividend package involves various considerations. If you require advice in this area, please don’t hesitate to get in touch for assistance.