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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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NIM12014 - Class 1: Calculating Class 1 NICs for Directors: Directors loan accounts and payments on account of earnings: Introduction

Regulation 22 SSCR 2001

It is common for director’s remuneration to be credited to an account with thecompany (commonly a current or loan account). It is also used for items other thanremuneration so the issue is whether any personal expenditure debited to the account orcash withdrawn from the company could be a payment on account of earnings.

Regulation 22 SSCR 2001 treats as remuneration from employed earner’s employment anypayment made by a company to or for the benefit of a director if:

  • it would not otherwise be earnings, and
  • it is made on account of, or by way of an advance on a sum which would be earnings

You therefore need to identify to what remuneration a director is entitled and whenthat entitlement arises. The entitlement could be under a service agreement or some otheragreement.

If there are no remuneration agreements between directors and the company, and the companyhas adopted Table A of the Companies (Tables A to F) Regulations 1985, remuneration isnormally voted at the annual general meeting, which is usually held shortly after the endof the company accounts year. Class 1 NICs is due at the time of payment of earnings sothat, normally, the time of payment of remuneration is when it is voted. The Memorandumand Articles of Association of the company, a copy of which are usually held in the‘Permanent Notes’ folder of the Corporation Tax file, will state whether Table Ahas been adopted.

Directors, like other people, need to meet personal expenditure throughout the year andaccordingly require funds to support that expenditure. Until the remuneration is voted, orotherwise authorised, there are no earnings within sections 3 and 6 SSCBA 1992. If howeverpayments are made on account of the expected remuneration, those payments are treated asearnings because of regulation 22. It is important to note that regulation 22 cannotchange a loan, or partial or full repayment by the company of a loan, into a payment ofearnings. The payment has to be on account of earnings.