This is for small UK companies that pay a director through payroll, including one-person companies where the director runs the payroll. It explains the annual earnings period, the two calculation methods HMRC allows, what changes when someone becomes or stops being a director, and what goes on the payroll report.
What is the annual earnings period?
It is the rule that a director's National Insurance is worked out on their total earnings for the tax year. GOV.UK says directors are classed as employees and pay National Insurance on annual income from salary and bonuses over £12,570, worked out from annual earnings rather than from what they earn in each pay period.
HMRC's National Insurance Manual explains why the rule exists: without it, a director could be voted their whole year's pay in one week and avoid most of the employee contribution, because the weekly or monthly upper limit would cap it. The rule has applied since 6 April 1983.
| Threshold or rate | 2026/27 |
|---|---|
| Lower earnings limit | £6,708 a year |
| Primary threshold (employee starts paying) | £12,570 a year |
| Secondary threshold (employer starts paying) | £5,000 a year |
| Upper earnings limit | £50,270 a year |
| Employee rate | 8% between £12,570 and £50,270; 2% above |
| Employer rate | 15% above £5,000, no upper limit |
A worked example: one big payment
Say a director takes their whole £24,000 salary for 2026/27 in a single month. Here is the National Insurance on that payment for a director, and what it would be for an ordinary employee on a monthly earnings period paid the same amount in one month.
| Director (annual period) | Ordinary employee (monthly period) | |
|---|---|---|
| Employee NI | £914.40: 8% of £11,430 (£24,000 minus £12,570) | £647.50: 8% of £3,141 plus 2% of £19,811 |
| Employer NI | £2,850.00: 15% of £19,000 (£24,000 minus £5,000) | £3,537.45: 15% of £23,583 (£24,000 minus £417) |
The director pays more and the company pays less than in the monthly case, and in every other month of the year the director owes nothing more. Paid evenly at £2,000 a month, the director's total for the year comes to the same £914.40 and £2,850.00, which is the point of the rule: timing doesn't change the yearly bill.
A second example: a director paid £1,500 a month who also gets a £20,000 bonus in March has annual earnings of £38,000. Employee National Insurance for the year is 8% of £25,430, which is £2,034.40, and employer National Insurance is 15% of £33,000, which is £4,950.00.
Standard method or alternative method?
GOV.UK allows two methods, and your payroll software does the sums for either. Both end with the same total for the year.
- Standard annual earnings period method (code AN on the FPS): each time you pay the director, work out National Insurance on their total pay for the tax year so far, including bonuses, and take off what they have already paid. Common for directors paid irregularly.
- Alternative method (code AL on the FPS): each time you pay the director, work out National Insurance on that period's pay only, as for other employees, then recalculate on an annual basis at the last payment of the year and deduct anything more that is due. Common for directors paid a regular monthly salary.
With the alternative method the monthly payslips look normal through the year, and the adjustment, if any, shows on the final one. With the standard method a director on a steady salary often pays nothing until their pay for the year passes £12,570, then pays more in the later months.
Appointed or leaving during the year
- Appointed during the tax year: the director gets a pro rata earnings period, the number of weeks left in the tax year counting the week of appointment (NIM12022). The thresholds are scaled to those weeks, always on a 52-week basis.
- Director on 6 April, or leaving during the year: the annual earnings period applies for the whole of that tax year.
- Stops being a director but stays as an employee: keep using the director's earnings period until the end of that tax year, then switch to normal pay periods from the next one.
- After the last payment as a director, delete the director's NI calculation method on the FPS, and deduct any National Insurance still owed from that last payment.
If the director's category letter changes during the year, for example when they reach State Pension age, GOV.UK says they may be due a refund; payroll software recalculates either at the time of the change or at year end.
What goes on the payroll report
- Report the director's pay and deductions on your Full Payment Submission (FPS) each time you pay them, like any employee.
- Fill in the director's NI calculation method field: AN for the standard method or AL for the alternative method.
- Fill in the week of the director's appointment.
- Pay the National Insurance to HMRC with the rest of the PAYE bill on your usual schedule, monthly or quarterly. Annual calculation doesn't mean annual payment.
Employer National Insurance applies to a director's salary even when the director is the company's only employee. In that case the company can't claim Employment Allowance: GOV.UK excludes companies whose only employee paid above the secondary threshold is a sole director.
Do dividends count for National Insurance?
No. HMRC's manual (NIM12012) says directors receive dividends as shareholders, not as directors, so dividends are not earnings for National Insurance. They are taxed under the dividend rules instead. Our post on salary vs dividends works through how the two combine for a sole director.
Where PayDocs fits
PayDocs makes payslips from your payroll figures, and our page on payslips for company directors covers the details that matter for a director. PayDocs works out PAYE income tax, National Insurance and supported deductions for 2026/27 pay dates. Because directors' National Insurance depends on the whole year, enter the figures your payroll software worked out for each payment; every line stays editable. You preview free and pay per payslip.
This is general information about UK rules for the 2026/27 tax year, as published on 8 October 2026. It is not tax or legal advice.
Questions
What is the annual earnings period?
The rule that a company director's Class 1 National Insurance is worked out on their earnings for the whole tax year, not each pay period, so paying a year's salary in one month doesn't reduce it.
How much National Insurance does a director pay in 2026/27?
On category A, 8% of yearly earnings between £12,570 and £50,270 and 2% above that. The company pays 15% on the director's earnings above £5,000 a year.
Can I use normal monthly National Insurance for a director?
Yes, under the alternative method: deduct as for other employees each month, then recalculate on an annual basis at the last payment of the tax year and deduct anything extra that is due.
Do dividends count for National Insurance?
No. HMRC treats dividends as paid to the director as a shareholder, so they are not earnings for National Insurance. Income tax on dividends follows separate rules.
What if someone becomes a director part way through the year?
They get a pro rata earnings period: the weeks left in the tax year, counting the week they were appointed. Payroll software scales the thresholds to that number of weeks.
Sources
- GOV.UK: National Insurance for company directors
- HMRC: CA44, National Insurance for company directors (2026 to 2027 edition)
- HMRC National Insurance Manual: NIM12001, calculating Class 1 NICs for directors
- HMRC National Insurance Manual: NIM12021, annual earnings periods for directors
- HMRC National Insurance Manual: NIM12022, directors appointed or ceasing during a tax year
- HMRC National Insurance Manual: NIM12012, directors and dividends
- GOV.UK: Rates and thresholds for employers 2026 to 2027
- GOV.UK: Employment Allowance, check if you're eligible
Sources checked 8 October 2026. This article explains how pay documents work; it is not tax or legal advice.
