Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
A company director is an office holder, and HMRC works out a director's National Insurance over an annual earnings period rather than pay packet by pay packet [1]. That single rule, combined with an employer National Insurance rate of 15% on earnings above a £5,000 Secondary Threshold [2], makes director payroll behave differently from standard employee payroll from the very first payrun.
The difference matters most in owner-managed limited companies, where the director is often the only person on the payroll and draws a modest salary alongside dividends. Getting the mechanics right protects the company from incorrect Real Time Information filings, miscalculated contributions and a missed relief or two.
This guide sets out when a director has to run payroll at all, how the annual National Insurance method works and why it differs from standard payroll, the two calculation methods HMRC permits, the pro-rata rules for a mid-year appointment, and the Employment Allowance trap that catches single-director companies. It is written for the 2026-27 tax year.
Key takeaways
- A company director's National Insurance is assessed on an annual earnings period, so contributions can be nil for months and then rise sharply once cumulative pay crosses the Primary Threshold of £12,570 a year [1].
- An employer must register for PAYE before the first payday if any employee, including a sole director, is paid at or above the Lower Earnings Limit, receives benefits or expenses, has another job or draws a pension [3].
- HMRC permits two director methods: the standard annual method and the alternative method, and the choice is flagged on the Full Payment Submission [1].
- Employer National Insurance runs at 15% on earnings above the £5,000 Secondary Threshold for the 2026-27 tax year [2].
- A company with a single director and no other employee above the Secondary Threshold cannot claim the Employment Allowance [8].
Does a company director need to run payroll?
A limited company is a separate legal person, so a director who takes a salary is an employee of that company for payroll purposes, even where the director owns all the shares. The company, as employer, is responsible for operating PAYE on that salary and reporting it to HMRC [4].
Registration is the first step. An employer must register for PAYE with HMRC before the first payday, and HMRC advises allowing up to five working days to receive the employer PAYE reference [3]. A company cannot file its first Full Payment Submission without that reference, so leaving registration to the day of the payrun risks a late first filing.
When PAYE registration is actually required
Registration is not automatic for every company. An employer does not need to register for PAYE if none of its staff is paid at or above the Lower Earnings Limit, receives taxable benefits or expenses, has another job or receives a pension [3]. For the 2026-27 tax year the Lower Earnings Limit is £129 a week, which is £6,708 a year [2].
In practice most working directors cross at least one of those tests. A director who draws a salary at or above £6,708 a year, or who has income from another employment, triggers the registration requirement. A director who takes no salary at all and lives on dividends only may not need a PAYE scheme, though many still register so that the salary can be restarted without delay.
Single-director companies
A single-director company runs payroll in the same way as any other employer, but with two wrinkles. The director is both the office holder and, usually, the only person on the payroll, so the annual National Insurance method applies to the one salary the scheme pays. The company also loses access to the Employment Allowance in most cases, a point covered in detail later in this guide [9].
Owner-managed companies and one-person limited companies frequently pair a salary with dividends, and the salary level is a planning decision in its own right. Modern UK payroll software for SMEs applies the director National Insurance rules automatically, which removes the manual reconciliation that trips up spreadsheet payrolls.
How a director's National Insurance is different
For a standard employee, National Insurance resets every pay period. A monthly-paid employee who earns above the Primary Threshold in one month and nothing the next pays contributions only in the month the earnings land. Directors are treated differently: their National Insurance is calculated on an annual earnings period, so it is the cumulative pay across the whole tax year that matters, not the pay in any single period [1].
The practical effect is that a director can run for several months with no employee National Insurance at all, because cumulative pay has not yet reached the annual Primary Threshold of £12,570, and then start paying contributions once that cumulative figure is crossed [2]. The thresholds that drive the calculation are set on an annual basis for directors.
The annual thresholds for the 2026-27 tax year are shown below [2].
| Threshold | Annual figure | What it triggers |
|---|---|---|
| Secondary Threshold (ST) | £5,000 | Employer National Insurance at 15% above this point |
| Lower Earnings Limit (LEL) | £6,708 | Access to contributory benefits; earnings recorded |
| Primary Threshold (PT) | £12,570 | Employee National Insurance at 8% above this point |
| Upper Earnings Limit (UEL) | £50,270 | Employee rate drops to 2% above this point |
Two features of this table catch directors out. First, the employer starts paying National Insurance at £5,000 while the employee pays nothing until £12,570, so the company carries employer contributions on the band between the two even when the director personally pays none [2]. Second, because the Primary Threshold is applied annually, the whole £12,570 allowance can be used up by the time a higher salary is drawn later in the year.
The standard annual method
Under the standard method, National Insurance is worked out on the director's total pay for the tax year to date, and the contributions already paid are subtracted to give the amount due in the current period [1]. HMRC describes this as working out the National Insurance on total pay over the tax year so far, then deducting what has already been paid [1].
This method suits a director who is paid irregularly, for example a single annual bonus or variable monthly amounts, because it always reflects the cumulative position. It does mean that employee contributions can be zero early in the year and then jump once cumulative pay passes £12,570, which can surprise a director expecting a smooth monthly deduction [2]. Payroll software that holds the HMRC Recognised status for Real Time Information handles this reconciliation on every payrun [5].
The alternative method
The alternative method lets the company calculate a director's National Insurance like a standard employee during the year, period by period, and then reconcile to the annual position in the final pay period of the tax year [1]. HMRC refers to this as the alternative method and requires a final-period adjustment so the annual total comes out correct [1].
The attraction is smoother monthly deductions for a regularly paid director, which makes personal cash flow more predictable. The obligation is that the company must still true up to the annual figure at year end, so the total contributions for the year match what the annual method would have produced [1]. The choice of method is reported on the Full Payment Submission, using the director National Insurance indicator, so HMRC knows which basis the company has applied [5].
The two methods are compared below.
| Feature | Standard annual method | Alternative method |
|---|---|---|
| Monthly deduction pattern | Can be nil early, then steps up | Smoothed across periods |
| Best suited to | Irregularly paid directors | Regularly paid directors |
| Year-end reconciliation | Built in each period | Required in the final period |
| Annual total for the year | Same under both methods | Same under both methods |
Whichever method is chosen, the annual total is identical, so the decision is about cash-flow timing rather than the amount of National Insurance owed [1].
Directors appointed part-way through the tax year
A director appointed after the start of the tax year does not get a full year of thresholds. The annual thresholds are pro-rated to the number of tax weeks remaining from the week of appointment to the end of the tax year, and the week of appointment is reported on the Full Payment Submission [1].
The pro-rata calculation scales each annual threshold by the fraction of the year remaining. For a director appointed with 18 tax weeks left in the year, the Primary Threshold becomes £12,570 divided by 52 and multiplied by 18, which is £4,352, and the Upper Earnings Limit becomes £50,270 divided by 52 and multiplied by 18, which is £17,402 [2]. Contributions then apply above those reduced thresholds for the remainder of the year.
This matters for a company incorporated mid-year, because the director's National Insurance allowance is smaller than a full £12,570 and contributions can begin sooner than the director expects. In the following tax year the director reverts to the full annual thresholds. Small business payroll software applies the pro-rata thresholds automatically once the appointment week is entered, which avoids a manual division that is easy to get wrong [5].
Setting up and running director payroll step by step
Running a compliant director payroll follows the same Real Time Information framework as any other employer, with the director method layered on top. The core steps are registration, recording the director's details, filing the Full Payment Submission on or before payday, and dealing with year end.
The Full Payment Submission is the heart of the process. HMRC requires an employer to send an FPS on or before the date it pays an employee, reporting pay, tax and National Insurance for the period [5]. Real Time Information has been mandatory across the UK since 2013, and payroll software that carries the HMRC Recognised badge submits the FPS automatically at the end of each payrun [5]. Moonworkers, an HMRC-recognised UK payroll platform, submits Real Time Information automatically and applies the director National Insurance rules without manual reconfiguration.
Real Time Information and the director indicator
When the company runs a director on the payroll, the Full Payment Submission carries a director National Insurance indicator and, where the director was appointed during the year, the week of appointment [1]. This tells HMRC that the annual earnings period applies and which calculation method the company has chosen [5].
An Employer Payment Summary is sent in addition to the FPS when the company needs to tell HMRC about a reduction, for example recovery of statutory payments or a claim to the Employment Allowance, or to report that no payments were made in a period [5]. Companies managing several directors or clients at once often rely on a payroll bureau platform that files both submissions for every scheme from one dashboard [4].
Tax codes for directors
A director's salary is taxed through PAYE using a tax code in the same way as any employee. The standard code for a person with the full Personal Allowance is 1257L, reflecting the £12,570 Personal Allowance for the 2026-27 tax year [6]. Income tax is then charged at 20% on income above the allowance up to £50,270, at 40% up to £125,140, and at 45% above that in England and Northern Ireland [6].
A director with more than one source of income, which is common where dividends or a second company are involved, may be issued a BR or D0 code on the salary so that the Personal Allowance is used against the other income [7]. HMRC adjusts codes through Real Time Information, usually within a few weeks, so a director who sees an emergency code on the first payslip normally finds it corrected automatically [7].
Employer National Insurance and the Employment Allowance for directors
Employer National Insurance is the cost that rises fastest for owner-managed companies. It is charged at 15% on the director's earnings above the £5,000 Secondary Threshold for the 2026-27 tax year, and the rate rose from 13.8% to 15% from 6 April 2026 [2]. The mechanics of that charge are set out in Moonworkers' guide to employer National Insurance. Because the Secondary Threshold sits well below the Primary Threshold, the company pays employer contributions on a band of salary where the director personally pays nothing.
The Employment Allowance can offset part of that bill. It lets an eligible employer reduce its annual employer National Insurance liability by up to £10,500 [8]. From 6 April 2025 the previous restriction that barred employers with more than £100,000 of Class 1 National Insurance in the prior year was removed, widening eligibility [8].
The single-director trap
The catch for owner-managed companies is specific. A company whose only employee liable for secondary Class 1 National Insurance is a single director cannot claim the Employment Allowance [8]. HMRC's detailed guidance confirms that a company with one director and no other employee paid above the Secondary Threshold is excluded, and that eligibility returns only when a second person is paid above that threshold for part of the year [9].
The conditions that decide eligibility for an owner-managed company are summarised below [9].
| Company situation | Employment Allowance available? |
|---|---|
| Single director, no other employees above the ST | No |
| Single director plus one employee above the ST | Yes |
| Two or more directors each above the ST | Yes |
| Director plus family member above the ST | Yes |
A second salaried employee therefore changes the position, but the employee must genuinely be paid above the Secondary Threshold for the allowance to apply [9]. This is a frequent planning point for companies deciding whether to bring a spouse or business partner onto the payroll.
A worked example of a director's annual position
Consider a director who draws a salary of £12,570 across the 2026-27 tax year, matching the Primary Threshold, with no other employees on the scheme. The director pays no employee National Insurance, because cumulative pay does not exceed the £12,570 annual Primary Threshold [2]. The director also pays no income tax, because the salary equals the £12,570 Personal Allowance [6].
The company, however, does pay employer National Insurance. Earnings above the £5,000 Secondary Threshold attract employer contributions at 15%, so the company pays 15% of £7,570, which is £1,135.50 for the year [2]. Because this is a single-director company with no other employee above the Secondary Threshold, the Employment Allowance is not available to cover that cost [8]. The example shows why the salary level is a genuine planning decision rather than a default, and why the employer National Insurance band between £5,000 and £12,570 is the figure owner-managed companies watch most closely.
Work out a director's take-home and employer cost
Before fixing a director's salary, a company can size the full picture with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross salary and shows the employer National Insurance cost alongside the net pay.
£ per month
e.g. 1257L, S1257L, BR, D0
S = Scotland · C = Wales · W1/M1 = non-cumulative
Enter a salary or hourly rate above
About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
Director payroll is standard PAYE with one defining twist: the annual earnings period for National Insurance. That twist shapes everything downstream, from the uneven monthly deductions a director sees on early payslips to the pro-rata thresholds that apply after a mid-year appointment, and it is the reason a director's payroll cannot simply be run like any other employee's. Layered on top are the employer National Insurance rate of 15% and the Employment Allowance rules that so often exclude the single-director company.
The direction of travel is towards automation of exactly these reconciliations. As more owner-managed companies run payroll inside accounting and platform software rather than on spreadsheets, the annual director calculation, the Real Time Information filing and the Employment Allowance eligibility check increasingly happen automatically on each payrun. The companies that stay compliant are the ones whose payroll engine knows the director rules without being told twice.
Frequently asked questions
Does a sole director of a limited company have to run payroll?
Only if the company meets one of HMRC's registration tests. A sole director must register for PAYE and run payroll if paid at or above the Lower Earnings Limit, which is £6,708 a year for the 2026-27 tax year, or if the director receives benefits or expenses, has another job or draws a pension [3]. A director who takes only dividends and no salary may not need a PAYE scheme, although many companies register anyway so a salary can be started without delay.
Why does a director pay no National Insurance some months and then a lot?
Because a director's National Insurance is calculated on an annual earnings period rather than each pay period. Under the standard method the contributions are based on cumulative pay for the year, so nothing is due until cumulative pay passes the annual Primary Threshold of £12,570, after which deductions begin and can look large in the period they start [1]. The alternative method smooths this by deducting period by period and reconciling at year end.
Can a single-director company claim the Employment Allowance?
No, not where the director is the only employee paid above the Secondary Threshold. HMRC excludes a company whose sole employee liable for secondary Class 1 National Insurance is a single director [8]. The allowance becomes available if the company employs at least one other person paid above the Secondary Threshold during the year [9].
What is the director National Insurance indicator on an FPS?
It is the field on the Full Payment Submission that tells HMRC the person is a director and therefore uses the annual earnings period, along with the calculation method the company has chosen and, for a mid-year appointment, the week the director was appointed [1]. Payroll software sets this indicator automatically when a person is recorded as a director, so the Real Time Information filing reflects the correct basis [5].
Image prompt for Imagen (also in frontmatter)
Documentary-style wide shot, a UK small company director sitting at a busy office desk in a converted warehouse space, reviewing a printed payroll report, soft daylight from a north-facing window, late morning, muted earthy palette of warm grey, oak, paper white, central London office building visible in the background through a window, off-centre composition, the subject is in the right third, shot on a Leica Q3 at 28mm f/2.8, photojournalism, 35mm film grain, no AI artefacts, no warped hands, no warped text, landscape orientation 16:9.
