NIM12001 | Class 1: Calculating Class 1 NICs for Directors: Introduction

The legislation on employed earners and Class 1 contributions applies to directors unless otherwise stated or specific administrative concessions apply.

Payments to a director are liable for Class 1 contributions because a directorship is an office (ESM2501 for offices generally and ESM4040 for directors) and therefore within the definition of “employed earner” in section 2(1)(a) of the Social Security Contributions and Benefits Act 1992.

Normally payments to a director, for acting as a director, are earnings for Class 1 but there are exceptions. These are where the conditions of regulation 27 of the Social Security (Contributions) Regulations 2001 (SSCR 2001) (SI 2001 No 1004) are satisfied for certain payments to professional people and to nominee directors (NIM12004). There is also an administrative concession where a non-resident director only attends board meetings in Great Britain & Northern Ireland (NIM12013).

Directors can also be shareholders in their companies so payments to them can be in that capacity rather than as directors (NIM12012). Particular care needs to be exercised when considering whether payments to directors are advance payments of earnings under regulation 22 of SSCR 2001 (NIM12014).

Unlike other employed earners, the earnings period of a director, as defined in the legislation, is normally the year in which the earnings are paid (regulation 8 of SSCR 2001) (NIM12021). An earnings period for a director is therefore commonly designated an annual earnings period (AEP) although it is not a term used in the legislation. Without the legislation, which was introduced from 6 April 1983, a director could be voted the whole of their remuneration in one week of the tax year and avoid most of their Class 1 primary liability because of the weekly or monthly Upper Earnings Limit (UEL).