Why your National Insurance deductions may just have changed…

December 18th, 2019

Not quite the Christmas present you were looking for, but for many Company Directors, December is the month where a National Insurance deduction may well suddenly appear on your payslip after a blissful 8 months of nil deductions – sorry!! The reason for this dates back to how you were originally set up in Xero Payroll at the start of the tax year. IMPORTANT to note is that, at the end of the 12 month tax year, for like for like salaries, the eventual outcome and NI paid will be exactly the same irrespective of how you were set up.

The set up choices for employees who are Directors in Xero are the Alternative Method or Annual Method. The Alternative Method charges the NI on a monthly basis on anything over the monthly NI threshold whereas the Annual method only starts charging NI after the cumulative pay for the year reaches the annual threshold. So the choice is to pay a regular small amount for 12 months (Alternative) or to pay no NI for 8 months and then pay a higher amount for NI in the last 4 months of the tax year. 

Ultimately two Directors being paid the same amount and on the same tax code will pay exactly the same NI by the end of the year, irrespective of which set up option has been used. From April 2020 The Numbercrunchers will default all affected clients to the Alternative Method so a small monthly deduction will be seen every month – please let us know if you would prefer to use the Annual Method! If you would like more detail on which method to select, HMRC offers guidance at https://www.gov.uk/employee-directors

Small Business - Smart Thinking - because YOUR ACCOUNTS MATTER