When you’re a director of a limited company, there are special rules that apply to you when calculating Class 1 National Insurance Liabilities.

The special rules allow directors of personal and family companies to control how and when they are paid. This would enable them to reduce their Class 1 National Insurance liability by manipulating the earnings period rules.


Regardless of company directors’ pay frequency, there is an annual earning period for National Insurance.  National Insurance liability is calculated cumulatively based on these thresholds unless they opt-out and apply the alternative arrangements.

For 2021/22 these are as follows:

  Annual threshold
Lower earnings limit £6,240
Primary threshold £9,568
Upper earnings limit £50,270


A director is paid £8,000 a month. In month 1, she pays no National Insurance as her earnings are below the annual primary threshold of £9,568.

In month 2, her earnings for the year to date are £16,000. By applying the annual thresholds, her total liability on her earnings to date of £16,000 is £771.84 (12% (£16,000 – £9,568)). As she paid no National Insurance in the month, her liability for month 2 is £771.84.

For months 3 to 6 inclusive, her earnings for the year to date fall between £9,568 and £50,270. Consequently, she pays employee’s National Insurance at 12% on her earnings for the month of £8,000, equal to £960 each month.

In month 7, her earnings for the year to date are £56,000 (7 months @ £8,000 a month), on which total contribution of £4,998.84 (12% (£50,270- £9,568)) + 2% (£56,000 – £50,270)) are due. She has already paid £4,611.84 (£771.84 + (4 x £960)), leaving £387 due for the month.

As her earnings for the year have now exceeded the upper earnings limit, she will pay National Insurance at the rate of 2% of all future payments – a liability of £160 per month.

Applying the annual earnings period rules means that the contribution liability falls unevenly throughout the year. The liability for the year is £5,798.60 (12% (£50,270 – £9,568) + (2% (£96,000 – £50,270))).


For directors who are paid regularly, an alternative to the Annual Earnings Period method would be to calculate the National Insurance for that pay period. This is the same as an employee. At the end of the year, payroll would work out if there is any National Insurance due and deduct it.

If this basis is adopted, the director in the above example would pay National Insurance of £483.26 (12% (£4,189 – £797) + (2% (£8,000 – £4,189))) each month for months 1 to 11, with a final payment of £482.74 in month 12.

The annual liability will remain the same over the year. However, it is just a different method used to collect the National Insurance due. Each director will have a preference. This just creates some flexibility.

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