PAYROLL INSIGHT
Company directors and Class 1 NICs
Mike Nicholas MCIPP explains the rules for operating an annual earnings period for company directors by reference to the legislation and guidance
T he Social Security (Contributions) Regulations 2001 (SSCR), which have effect by virtue of the Social Security Contributions and Benefits Act 1992, set out the rules for calculating Class 1 National Insurance contributions (NICs) for employed earners (‘employees’) and company directors (see Definitions, below). When earnings-related Class 1 NICs were introduced in the late 1970s to fund a reformed state pension system – known as the state earnings-related pension scheme, or simply SERPS – no specific provisions for calculating Class 1 NICs for company directors existed in the legislation at that time. This meant directors were treated the same as employees. For several years after the introduction of earnings-related NICs both the primary (employee) and secondary (employer) contributions applied only to earnings up to the weekly/monthly upper earnings limit (UEL). This feature was exploited to reduce NICs liability, so changes in the early 1980s addressed this. In April 1983, amendments to the SSCR came into force requiring an annual (or pro rata) earnings period to be used when calculating Class 1 NICs for company directors. Two years later, the UEL was effectively removed for the
purpose of calculating secondary NICs. The 1983 amending regulations addressed a perceived NICs avoidance practice whereby company directors were regularly being paid a small salary with a substantially larger payment (e.g. a bonus) being made, say, annually. The effect of this practice was that for most of the year nil or little NICs were paid as the regular earnings were close to the lower earnings limit (LEL), but in the month (or week) that the large payment occurred only NICs up to the UEL were payable with no NICs liability arising on the excess. Overall, the Class 1 NICs liability for company directors was lower than, for example, an employee who received exactly the same total earnings spread evenly across the weekly or monthly pay periods in the year.
become less attractive since April 2016 when the taxation rules on dividends were amended; might this have led some companies to change their remuneration strategy in tax year 2016–17? A further situation sometimes encountered is where a person is a director (or employee) of two or more ‘associated’ companies each paying to him or her a salary etc. Sometimes the earnings from these engagements are paid separately (perhaps at different frequencies) or jointly. In prescribed circumstances, these earnings have to be aggregated for the purpose of calculating Class 1 NICs. What the SSCR specifies Regulation 8 of the SSCR, which is reproduced below with some editing, prescribes the rules. (A recently revised copy of the SSCR can be found here: http://bit.ly/2ljOFJV.) (Comments in italics are the author’s, and those in colour are taken from HM Revenue & Customs’ National Insurance Manual , with actual links quoted.) (1) If a person is, or is appointed, or ceases to be a director of a company during any tax year, the amount, if any, of Class 1 NICs payable in respect of earnings paid to or for the benefit of that person in respect of any employed
...amending regulations addressed a perceived NICs
avoidance practice...
Another practice has been to supplement a director’s small salary with dividends based on the company’s profits. This particular practice, however, may have
| Professional in Payroll, Pensions and Reward | April 2017 | Issue 29 22
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