For most employees, National Insurance contributions (NIC) earnings periods are calculated based on their regular pay intervals. In contrast, all directors have an annual earnings period, regardless of their actual pay intervals, where contributions for the year are calculated by reference to the annual NIC thresholds.
There are two methods of calculation – the annual earnings period basis and the alternative basis. While both methods result in the same total NIC amount owed by both the director and the employer over the fiscal year, the timing and pattern of deductions differ.
Annual basis – the default method
Under this method, NICs are calculated on the director's cumulative earnings for the whole tax year. Rather than calculating NICs on each pay period, this method treats the director's NICs as accruing gradually over the year, allowing for variable or irregular pay. The contributions due are found by calculating the liability on earnings to date for the tax year using the annual thresholds and deducting contributions already paid during the year. The balance is the contributions due on the current payment.
For the 2025/26 tax year, no contributions are owed until the primary threshold of £12,570 is reached. Once this threshold is surpassed, contributions are payable at 8% until the upper earnings limit of £50,270 is reached, after which the rate drops to 2%. Secondary contributions paid by the employer are calculated similarly. If employer NICs are due (because the Employment Allowance (EA) cannot be claimed), no contributions are payable until the secondary threshold (or upper secondary threshold for employees under 21, if applicable) of £5,000 is reached, at which point the contributions rate is 15%.
Alternative method (regular earnings method)
This method is optional and often used when a director is paid on a regular basis. NICs are calculated in the same way as for regular employees, allowing the director’s NICs to be calculated using weekly or monthly thresholds, as relevant. At the end of the tax
year, a reconciliation is performed in the final pay period using annual thresholds, and any outstanding contributions deducted from the final payment. If the final payment is insufficient to cover the primary contributions due, the employer must pay these amounts.
Since this method is optional, it can only be used if the director agrees. Additionally, the director must usually receive their earnings in a payment pattern for which a regular earnings period can be established, and those payments should exceed the lower earnings limit for the relevant pay period.
Which to use?
The choice of method depends on how and when the director is paid, and the company's administrative preferences – both have pros and cons.
If the director receives irregular payments, perhaps being paid only a few times a year, then the annual method may be preferable. NIC payments will be lower early in the year when earnings are reduced, and this method can allow for tax planning, minimising the risk of overpayment.
However, using annual rates and thresholds can lead to considerable variation in deductions, even if gross salary payments remain constant. To enable more consistent contributions throughout the year, the director may prefer to opt for the alternative method.
