Contractors' Questions: Is National Insurance pro-rata?

Contractor’s Question: Is National Insurance pro-rata? And is it calculated differently for PSC directors who are their company’s employee than it is for a conventional employee?

Expert’s Answer: National Insurance (NI) allowance for employees is pro-rated based on the pay frequency. So if an employee is paid on a monthly basis they will get a monthly NI allowance, and if they are paid via a weekly payroll, they get a weekly NI allowance.

Bear in mind, NI allowance cannot be backdated or carried over to another period. As a result, if an employee starts working half way through a tax year, the allowance for the first six months is effectively lost. This also means that if they receive a bonus, which is in excess of the monthly/weekly allowance, NI will be payable for the whole balance of the bonus.

It might help to know that in the current tax year, the monthly primary threshold set by HMRC for employees is £672. And an employee earning £883 per month will therefore be subject to monthly employee NI contribution of £25 (£883 subtract £672 = £211, then multiply by current employee NI rate of 12%), and monthly employer NI contribution of £29 (£883 subtract £676 – the primary threshold for employers, = £207, then multiply by current employer NI rate of 13.8%). For the employee, the amount of £25 will be deducted from their monthly pay and will remain the same amount (£25) regardless of how many months in the year they work.

This is however different for personal service company directors, as their allowance is applied on an annual basis. If a director works for all 12 months of the tax year, the whole allowance of £8,060 (employee NI primary threshold of £672 multiplied by the 12 months of the year) and £8,112 (employer NI primary threshold of £676 multiplied by 12 months of the year) will apply in the current tax year. This will be deducted from the income as it is paid out.

For example, if a director is paid £883 in salary every month, then they will not be subject to NI for the first 8 months of the tax year. If they started working in April 2015, they will be subject to NI for the first time in January 2015. From January, the salary in excess of the threshold will be subject to 12% and 13.8% for employee and employer NI respectively. This does not depend on the frequency with which they are paid.

If the director works for less than 12 months of the year, the annual allowance is reduced accordingly. For example, if a director works only 5 months of the year, the NI employee allowance is reduced to £3,358 (£8,060 multiply by 5/12) and the NI employer allowance is reduced to £3,380 (£8,112 multiply 5/12). Using the same example of a director with monthly salary of £883, they will not be subject to NI for the first three months as they will be under the threshold. Subsequently, and once the threshold is passed, NI will be calculated as a percentage of the whole monthly salary with no allowance. This means that employees and directors who earn the same amounts every month will be subject to the same amount of NI, but it will be deducted earlier from the employees’ pay.

The expert was Sumit Agarwal, managing director of contractor accountancy firm DNS Associates.

Monday 14th March 2016