Directors’ NICs: Make It Work for You in 2025–26
Main Topics & Discussion
How Director NICs Differ From Regular Employees
- Directors have an annual earnings period, not weekly/monthly thresholds
- HMRC calculates NICs based on total annual earnings
- Irregular pay? No problem—NICs are smoothed out over the year
- Directors are not subject to minimum wage laws
Two Methods for NIC Calculation
1. Annual Earnings Method (Default)
- Works on cumulative pay vs. annual thresholds
- Ideal for directors taking irregular or one-off salary payments
- Flexible but may result in large NIC bills late in the year
2. Alternative Method (Regular Earnings Basis)
- NICs calculated monthly like regular employees
- Ideal for steady monthly salaries
- Requires end-of-year reconciliation to ensure total NIC due is paid
2025–26 NIC Thresholds & Rates
- Primary Threshold (Employee): £12,570 (NIC starts here)
- Upper Earnings Limit: £50,270 (NIC drops to 2% above this)
- Employer NIC Threshold: £5,000 (NIC starts here)
- Employee Rate: 8% (then 2%) | Employer Rate: 15%
Choosing the Best Method
Annual Method
- Best for flexible, irregular salary patterns
- Slower NIC buildup—good for cash flow
- May cause unpredictable deductions
Alternative Method
- Best for steady monthly salary (e.g. £1,200/month)
- Predictable deductions, easier budgeting
- Must reconcile at year-end; risk of surprises if ignored
Salary Planning Options
Option 1: Pay £5,000 Salary
- No income tax, employee NICs, or employer NICs
- Doesn’t qualify as a state pension year
Option 2: Pay £12,570 Salary
- Full personal allowance used
- Triggers NICs but qualifies for state pension
- Check employment allowance rules if sole director
Common Mistakes to Avoid
- Using annual method without tracking thresholds
- Forgetting year-end reconciliation under alternative method
- Assuming £5,000 salary qualifies for pension—it doesn’t
- Missing out on planning opportunities that reduce NIC and tax
Real-World Examples
- One-off annual salary: Use annual method
- Monthly wage of £1,200: Use alternative method
- Reconcile by March or risk penalties
Final Thoughts
Director NICs give you flexibility—but require careful planning. Choose the right method, monitor thresholds, and don’t leave payroll to chance.Links Mentioned in This Episode
Episode Timecodes
- [00:00:00] – Intro: Why this matters for directors
- [00:00:32] – Director NIC basics vs employees
- [00:02:00] – Method 1: Annual Earnings Method
- [00:03:48] – Method 2: Alternative Method
- [00:05:53] – NIC thresholds and rates for 2025–26
- [00:06:33] – Comparing the two methods
- [00:08:00] – Salary planning tips
- [00:09:09] – Common NIC mistakes to avoid
- [00:10:00] – Real-world examples
- [00:10:55] – Final thoughts & next steps
Host & Show Info
Host Name: Mahmood Reza About the Host: Mahmood is an accountant, business finance coach, and founder of I Hate Numbers. With decades of experience advising directors and small businesses, he helps you plan it, do it, and profit. Podcast Website: https://www.ihatenumbers.co.uk/i-hate-numbers-podcast/🎧 Listen & Subscribe to I Hate Numbers
Make your director NICs work for you. Or listen on Apple Podcasts, share this episode, and check out the I Hate Numbers book for smarter business planning tips. Plan it. Do it. Profit.Additional Links
Transcript
Welcome to another episode of I
Speaker:Hate Numbers.
Speaker:I'm your host, Mahmood, and if you're a small
Speaker:business owner or a company director, this
Speaker:episode is gonna act as your financial sat.
Speaker:For NIS or national Insurance contributors to
Speaker:give it its full title.
Speaker:'cause when you know how the rules work,
Speaker:you will save money, you will reduce your
Speaker:stress, and you are in a stronger position to
Speaker:understand what's going on in your business.
Speaker:And you also minimize that HMRC grief.
Speaker:Let's crack off.
Speaker:I wanna stir up with the basics, first of all.
Speaker:And it's gotta be said that national
Speaker:insurance for directors is not the same.
Speaker:As for regular employees, only non directors.
Speaker:So if you run your own lichi company or
Speaker:you manage payroll for one, sit back,
Speaker:relax, listen closely.
Speaker:Now, directors in a lot of things are
Speaker:treated differently to other employees.
Speaker:And in this context, where do we talk about
Speaker:how NASH insurances are calculated
Speaker:throughout the year?
Speaker:Now firstly, there's the idea that directors
Speaker:have what's caught an annual earnings period.
Speaker:Now that means that HMRC checks your pay against
Speaker:yearly thresholds, not weekly or monthly,
Speaker:like regular employees.
Speaker:So even if you are paid monthly, your natural
Speaker:insurance calculations and contributions are
Speaker:not works out the same way as it would be
Speaker:for other employees.
Speaker:Now, if this is a handy approach, by the way, if
Speaker:your pay is irregular, fluctuates throughout the
Speaker:year and it smooths out the national insurance
Speaker:contributions you've gotta pay, there's less
Speaker:shock and more control.
Speaker:It's worth pointing out here, by the way, that
Speaker:directors are also not governed by minimum
Speaker:wage regulations.
Speaker:So there will be months when you're
Speaker:not gonna be paying yourself a great deal.
Speaker:There will be months when you're paying
Speaker:yourself a bit more.
Speaker:And directors.
Speaker:By the way, this context is not just
Speaker:for primer companies, it's also for cis
Speaker:not-for-profit companies.
Speaker:Directors are directors, are directors.
Speaker:Now, let's break this down a little bit more.
Speaker:We have two methods to choose from.
Speaker:When processing the payroll, and two ways
Speaker:to calculate director's national assurance Method
Speaker:number one is called the annual earnings method.
Speaker:This is the default calculation and it tends
Speaker:to be what most payroll people will choose.
Speaker:Method number two is the alternative method.
Speaker:That's really crazy.
Speaker:Different name or something called the
Speaker:regular earnings basis.
Speaker:Now in theory, they both lead to the same
Speaker:conclusion, the same total amount of national
Speaker:insurance contributions by the end of the tax
Speaker:year, but what you pay during the course of
Speaker:the year plus where the difference will lie.
Speaker:And what I wanna do is to walk through each one.
Speaker:So let's firstly start with method
Speaker:number one, the annual earnings approach.
Speaker:Now this is the one HMRC uses unless you
Speaker:specify otherwise.
Speaker:And here's how it works.
Speaker:You tot up all your earnings so far
Speaker:on the tax year.
Speaker:You check how that compares to the annual
Speaker:national insurance contributions threshold,
Speaker:deduct any national insurance contributions
Speaker:already paid, and the difference is the
Speaker:National Insurance contributions owed on
Speaker:your next pay step.
Speaker:It sounds simple and it is once you get
Speaker:your head around it and get the hang of it.
Speaker:Let's say for example, you are a director in
Speaker:April, you earn no salary in July, you decided
Speaker:to take 25,000 pounds.
Speaker:Now no national insurance contributions are PAV
Speaker:until your total earnings go over the threshold.
Speaker:Once you cross that line, national insurance
Speaker:contributions kick in.
Speaker:This suits to S who don't pay themselves a
Speaker:steady monthly wage, and it gives flexibility.
Speaker:Then an example that I just quoted in April.
Speaker:Obviously no salary, no national insurance
Speaker:contributions in July.
Speaker:Cumulatively we've got 25,000 If you are
Speaker:a normal employee.
Speaker:You would only pay the national insurance in
Speaker:the month that it arises.
Speaker:Here we look at a cumulative approach.
Speaker:Now, let's factor in the 25, 26 thresholds,
Speaker:and when I say 25, 26, I'm talking about
Speaker:between the period 6th of April, 2025 and the
Speaker:5th of April, 2026.
Speaker:Now, in that, and there's a few numbers
Speaker:here to share folks, the primary threshold,
Speaker:and that's when employee national insurance
Speaker:contributions kick in, not the employer.
Speaker:That's 12 5 70 currently.
Speaker:Upper earnings limit, and that's the figure
Speaker:when National Insurance contributions for the
Speaker:employee drops to 2%, that limit is 50,270
Speaker:and those two figures, by the way, the 12 570
Speaker:to 52 70 have been that for some years now.
Speaker:Next we have what we call rates measured
Speaker:in percentage terms, the employee national
Speaker:assurance rate is 8%.
Speaker:Up to that 52 70.
Speaker:Obviously once it exceeds 12 5 70, anything over
Speaker:that, you pay a fixed 2%.
Speaker:Now let's consider the employer.
Speaker:Now, if you are the employer, your national
Speaker:insurance contribution now starts at the
Speaker:level of 5,000 pounds.
Speaker:The employer rate for national insurance
Speaker:contributions if 15%, and remember, if you
Speaker:don't qualify for it for employment allowance,
Speaker:employers national insurance contribution
Speaker:is kicking above that 5,000 and you will
Speaker:have to pay that out.
Speaker:It's worth noting folks, check out the podcast
Speaker:listing here, and we've covered single directors
Speaker:employment allowance and national insurance
Speaker:rules here, so it is worthwhile reminding
Speaker:yourself, checking it out for yourself.
Speaker:Now, method number two is called the
Speaker:alternative method.
Speaker:There's nothing like originality
Speaker:is there in names.
Speaker:Now this works just like a regular employee setup.
Speaker:Each month, you calculate NASH insurance
Speaker:contributions based on that pay slip alone
Speaker:In isolation, you don't consider what
Speaker:historically it's paid, it's predictable.
Speaker:It's good for budgeting, and it's helpful
Speaker:for cash flow, but there's a twist.
Speaker:At the end of the year, you've got to do a
Speaker:better reconciliation.
Speaker:You've gotta check what you've actually paid on
Speaker:that alternative method.
Speaker:Against what it would've been against
Speaker:the annual thresholds.
Speaker:If for any reason you've underpaid the national
Speaker:insurance contributions throughout the year,
Speaker:then your final payslip of the year must make
Speaker:up the difference.
Speaker:And if you find there's not enough pay in that
Speaker:final period, then you step forward as the
Speaker:employer, and you've gotta cover that.
Speaker:HMRC does not want to be out of pocket.
Speaker:Now, when it comes to the alternative
Speaker:method, you've gotta make a conscious
Speaker:choice to choose that.
Speaker:It's not automatic.
Speaker:Your pay must follow a regular plan, so
Speaker:it's the same amount per week or the same
Speaker:amount per month.
Speaker:Now, decision time, we're now gonna consider which
Speaker:method is best for you.
Speaker:So let's look at the pros and cons.
Speaker:Let's deal with the annual earnings
Speaker:method, first of all.
Speaker:Now this is great if your pay is irregular.
Speaker:Maybe your remuneration strategies.
Speaker:You take out a dividend and you
Speaker:take out one figure that'll represent your
Speaker:salary, a big salary.
Speaker:The national insurance contributions build
Speaker:more slowly, and that's useful for your cashflow
Speaker:and tax planning.
Speaker:The downside is that your deductions may
Speaker:be volatile, jump around, and you get a
Speaker:big hit with national insurance one month.
Speaker:Under this method, you can have no
Speaker:NASH assurance for say the first 10
Speaker:months of the year.
Speaker:Get used to a steady wage packet and
Speaker:suddenly it kicks in for the last couple
Speaker:of months of the year.
Speaker:Now, if we look at the alternative
Speaker:method, the upside, you've got predictable
Speaker:monthly costs.
Speaker:Always good for budgeting and peace of
Speaker:mind, and being a big fan of planning and
Speaker:budgeting, that's gonna be something that you
Speaker:can factor in is simpler.
Speaker:For some payroll teams, it's the same
Speaker:calculation every month.
Speaker:Now we have many clients who have
Speaker:overseas employment.
Speaker:Employers are based overseas.
Speaker:In the uk we're used to lots of different variety
Speaker:of payrolls, weekly, monthly, fortnight,
Speaker:so we can handle that.
Speaker:Other people may not necessarily get able to.
Speaker:Anyway, let's get back to the podcast.
Speaker:Now.
Speaker:The downside is if you need to tidy things up
Speaker:at the end of the year.
Speaker:That could be unexpected costs.
Speaker:If you haven't put money aside, if you're doing it
Speaker:yourself, it could quite easily slip through.
Speaker:Are you gonna have problems later on?
Speaker:Now, let's factor in some salary planning tips.
Speaker:Now, option one, you pay yourself that 5,000
Speaker:pounds I. For 25, 26, you can legitimately pay
Speaker:yourself a salary as a director of 5,000 pounds.
Speaker:Remember, minimum wage regulations do not affect
Speaker:you as a director and you would avoid paying
Speaker:all tax on national insured contributions.
Speaker:So let's break that down.
Speaker:The employee National insurance contribution
Speaker:style at 12 5 70, so nothing there.
Speaker:Employer, NIC starts a five grand.
Speaker:Nothing there and the personal allowance
Speaker:is also 12 5 70.
Speaker:So if you do decide to pay yourself an annual
Speaker:salary of 5,000, you pay no income tax.
Speaker:No employee MSEs, no employer MSEs, and
Speaker:there's no impact and there's no need
Speaker:to worry about the employment allowance.
Speaker:Now before you rush off thinking, this sounds
Speaker:fantastic, Mahmood, there's a little bit
Speaker:of a caution here.
Speaker:A 5,000 pound salary does not qualify,
Speaker:does not count as a qualifying gear for
Speaker:your state pension.
Speaker:If you want four pension benefits, you need to top
Speaker:it up or consider other options and strategies.
Speaker:Again, this is a topic we've covered
Speaker:in previous podcasts, so check out the list
Speaker:of wonderful podcasts we've done, and it'll be
Speaker:in there now a summit.
Speaker:Before we look at the common mistakes to avoid.
Speaker:As a rule of thumb, under current legislation,
Speaker:you need 35 years of qualifying national
Speaker:insurers to get the full maximum state pension.
Speaker:What we're gonna now look at is common
Speaker:mistakes to avoid.
Speaker:So let's recap a few mistakes that we've
Speaker:come across ourselves.
Speaker:Pay the director a regular salary, but using
Speaker:the annual method without tracking the thresholds.
Speaker:Forgetting to reconcile if you're using the
Speaker:alternative method.
Speaker:Assuming that a 5,000 pound salary
Speaker:qualifies for state pension, it doesn't.
Speaker:It's a schoolboy error missing out on planning
Speaker:opportunities that save both tax ands.
Speaker:Now, those mistakes can be avoided if you
Speaker:seek the right advice.
Speaker:Check out the show notes at the end.
Speaker:By the way, for a link to our contact us
Speaker:page, our link to our resources here, that's
Speaker:gonna help you out.
Speaker:Yeah, let's imagine the scenario.
Speaker:You are a small consultancy business.
Speaker:You are the sole director.
Speaker:You don't take out monthly wages.
Speaker:Instead, you draw dividends and you've
Speaker:decided that it sues you to have one big
Speaker:salary payment at the end of the year.
Speaker:Now, in that case, the annual earnings
Speaker:method makes sense.
Speaker:Your accountant, your bookkeeper, your payroll
Speaker:person adds up your salary, works out the
Speaker:national insurance contributions that are
Speaker:due on the four years pay and handles it in run go.
Speaker:Let's look at the reverse side of that.
Speaker:You pay yourself 1200 pound a month.
Speaker:You like routine, your budget monthly.
Speaker:Then the alternative method is cleanup.
Speaker:Monthly deductions, no surprises.
Speaker:You know what your take home pay is, and
Speaker:you're paying as you go along, but remember,
Speaker:make sure you do that reconciliation
Speaker:exercise in March.
Speaker:Otherwise that door's gonna get knocked
Speaker:and you know who's gonna be at the door.
Speaker:It's gonna be HMRC.
Speaker:There are some final concluding thoughts.
Speaker:There is flexibility for national insurance
Speaker:for directors, but that flexibility
Speaker:can potentially mean complexity.
Speaker:We all can save you thousands if
Speaker:you plan ahead.
Speaker:But remember, put the method that fits
Speaker:your pay pattern.
Speaker:Watch those thresholds.
Speaker:Use the 5,000 pound salary tip.
Speaker:If it works for your situation and you're
Speaker:not concerned about state pension, or there
Speaker:are other ways that you're contributing
Speaker:to build that pension up, plan early.
Speaker:Don't wait till March to do it.
Speaker:And above all, if you don't know if
Speaker:you are unsure, don't do it yourself.
Speaker:Payroll can be a complex affair and mistakes.
Speaker:Normally met by HMRC with fines, penalties,
Speaker:and the rest.
Speaker:Now, if you decide you wanna plan your
Speaker:salary a bit more structured dividends,
Speaker:tax efficiently, consider it a moon ratio
Speaker:strategy, then book a call with us today at
Speaker:I Hate Numbers, we help you plan it, do it in
Speaker:profit, and we wanna make your life and tax
Speaker:as simple as possible.
Speaker:Thanks for listening.
Speaker:If you feel there's somebody
Speaker:you could benefit from this podcast.
Speaker:As always, I'd love it if you could share it cash
Speaker:your next time folks.
