NATIONAL INSURANCE - 12.11.2012

Are you paying too much NI?

One of your workers claims you’ve deducted too much NI from her salary. She says you have the “earnings period” wrong. As this was calculated by your payroll software you’re sure it’s right. What’s the problem?

NI earnings periods

Unlike tax, which is always worked out over a year, NI on salaries and wages is calculated according to the interval at which they are paid, e.g. weekly or monthly. These are known as “earnings periods”. Directors are an exception to this rule as they always have an annual earnings period even where they are paid more frequently. This doesn’t sound too tricky, but there are a number of situations where your payroll software might, in fact probably will, produce the wrong answer.

Late payments

Where, for any reason, salary etc. for an earnings period is paid late, this can cause your software to work out the NI incorrectly. This could happen where an employee starts working for you part way through a month, or you make commission or other variable payments later than the earning period for which they are due (see The next step).

Example - new employee

Jane, who’s just out of college, starts working for you on January 21. Your company’s pay day is the 25th of each month, but the payroll is run at least a week earlier. Therefore, you first pay Jane on February 25 for the days she worked in January plus a full month’s salary for February. Your software works out her NI as follows:

Salary Period Pay Employees’ NI Employers’ NI
January (9 days) £540 N/A N/A
February (1 month) £1,300 N/A N/A
Total paid February £1,840 £144.84 £167.80

This is incorrect as it ignores the January earnings period for which Jane is entitled to some earnings without paying NI. The correct position is:

Salary Period Pay Employees’ NI Employers’ NI
January (9 days) £540 £0 £0
February (1 month) £1,300 £80.04 £86.11
Total £1,840 £80.04 £86.11

Jane has overpaid nearly £65 in NI. Not a huge sum, but for someone starting their first job it’s probably significant. Plus, you’ve overpaid employers’ NI by £81. Again, not a fortune, but if it happens several times a year over, say, five years, this could add up to a couple of thousand pounds.

Tip 1. Although unlikely, check your software to see whether it can allocate two earnings periods for one amount. If it can’t, you might be able to use the tip below.

Tip 2. Where NI wouldn’t be payable on delayed salary had it been paid in the right month you can work around the problem (see The next step). Include it as pay subject to tax but not NI (all payroll software should have this option). This is not strictly correct, but it’s no more wrong than accepting the software’s normal calculation, plus it has the advantage of resulting in the correct NI.

Tip 3. Some payrol l programs allow you to override certain figures. Soif you can’t get any joy from our first two tips, work out the correct NI manually and override the figure calculated by the software.

For other situations where earnings periods may be wrong (TX 13.04.02A) and to see how to work out whether NI should have been due (TX 13.04.02B), visit http://tax.indicator.co.uk.

If you pay all or part of an employee’s salary due in a later month, payroll software won’t usually allocate the correct earnings period. This can result in incorrect NI. This happens most often with new employees who start after your payroll has been run. Usually, a manual adjustment can be made to correct it.

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