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HMRC internal manual

Compliance Operational Guidance

Alternative rights of recovery (PAYE directions): primary class 1 NICs: directors: employed earners legislation

The legislation on employed earners and Class 1 contributions applies to directors. Payments to a director, or payments for acting as a director, are liable for Class 1 contributions because a directorship is an office and therefore within the definition of ‘employed earner’ in Section 2(1)(a) SSCBA 1992. There are exceptions, specifically where

  • the conditions of Regulation 27, SSCR 2001 are satisfied for certain payments to professional people and nominee directors
  • there is an administrative concession where a non-resident director only attends board meetings in the UK.

Directors can also be shareholders in their companies so payments to them can be made in that capacity rather than as a director. Particular care needs to be exercised when considering whether payments to directors are advanced payments of earnings under Regulation 22, SSCR 2001.

Unlike other employed earners, the earnings period of a director, as defined in the legislation, is normally the tax year in which earnings are paid (Regulation 8, SSCR 2001). An earnings period for a director is therefore commonly designated as an ‘annual’ earnings period (‘AEP’) although this term is not used within the legislation that was introduced from April 1983. The legislation however does ensure that a director voted the whole of their earnings in one week of the tax year could not avoid most of their Class 1 primary NICs liability because of the weekly/monthly upper earnings limit (UEL).

Guidance on annual earnings period when calculating primary NICs liability can be found at COG932550.