For most employees, National Insurance (NIC) is simple: you earn money in a month, you pay tax on that month. For Company Directors, it works completely differently.
Directors have an annual earnings period. This means your NIC liability is calculated based on your total earnings for the entire tax year, not just the pay period.
This guide explains the two methods of calculating this (Standard vs Alternative), the 2025/26 Thresholds, and the impact of the new £5,000 Secondary Threshold.
| Threshold Name | Limit (Annual) | Limit (Monthly) | Rate (Director) | Rate (Employer) | | :--- | :--- | :--- | :--- | :--- | | Lower Earnings Limit (LEL) | £6,396 | £533 | 0% | 0% | | Primary Threshold (PT) | £12,570 | £1,048 | 8% * | 0% | | Secondary Threshold (ST) | £5,000 | £417 | 0% | 15% | | Upper Earnings Limit (UEL) | £50,270 | £4,189 | 2% | 15% |
Major Change for 2025/26: The Employer (Secondary) Threshold has dropped from £9,100 to £5,000. This means employers start paying the 15% tax much earlier in the salary scale.
Note: The Employee rate is 8% up to the UEL, then 2% above it.
(The "Standard" Director Method)
Under this method, you pay £0 National Insurance until your cumulative salary for the year hits the threshold. Once you cross the threshold, you pay tax on everything above it.
Pros: Cashflow advantage early in the year. Cons: Uneven net pay. You take home more in months 1-6 and less in months 7-12.
(Treating yourself like an employee)
Many payroll software packages default to this because it gives a consistent net salary. You calculate NICs each month as if the director has a monthly earnings period (1/12th of the annual thresholds).
Crucially, if you use this method, you MUST recalculate the liability on an annual basis in the final payroll (Month 12).
When does this matter? If you pay yourself a Bonus.
The reduction of the Secondary Threshold to £5,000 is the biggest headline of 2025. A director on a £12,570 salary will see a significant new cost.
Question: Can I avoid this?
I am a sole director. Can I use the Annual Method? Yes. In fact, you must legally be assessed cumulatively by the end of the year. The choice is whether you smooth it out (Table) or take the hit later (Standard).
Does this affect Dividends? No. NICs apply strictly to Salary and Bonuses. Dividends are exempt.
What happens if I leave the company mid-year? Because of the annual period, if you pay yourself £12,570 in Month 1 and then quit, you have used your full annual allowance. You won't get a NIC refund, whereas an employee on the monthly system might.
Disclaimer: Payroll rules are strict. Ensure your RTI submissions are accurate.