12.1
A Reminder of What the National Insurance System in the UK Is
In
this module, we will remind you about the ins and outs of the National
Insurance system, to further reinforce your understanding, whilst also
exploring what happens when an employee pays less than the standard rate of
National Insurance, including how you report this, and under what circumstances
this may happen.
Of
course, paying less in the way of National Insurance could be due to an error
on your part, i.e. incorrect numbers being reported to HMRC via the full
payment submission on your payroll software. In this case, it is important to
recognise the error immediately and report it accordingly. Steps should then be
taken to address the situation, with extra payments of National Insurance being
made, in order to bring National Insurance records for employees up to date,
without gaps or discrepancies. Avoiding these errors in the first place is the
best way forward.
National
Insurance is a statutory deduction that must be taken from the wages of a
person working in the UK, on any earnings over a certain amount. If an
individual earns under this amount they do not have to pay National Insurance,
but they can choose to do so if they want to keep up their National Insurance
contributions.
The current rates
of National Insurance deductions can be found here.
National Insurance deductions mean that
an employee is continuing to be entitled to certain benefits throughout their
working life and after retirement, such as state pension. In order to avoid
gaps in a National Insurance record, voluntary payments may be paid if
instructed by the employee, even when a person is entitled to pay less or no
National Insurance. We will explore these anomalies in more detail shortly as
the main topic for this module.
Payment
of National Insurance means benefits such as state pension, maternity pay or
Job Seeker's Allowance, to name just three, are available to the employees
should they need them, and also after retirement. Gaps in a National Insurance
record can mean reduced benefits or no benefits at all. It is for this reason
that gaps should be avoided if at all possible.
In
our last module, we explored the different classes of National Insurance;
however, in terms of general employment, and from an employer's point of view,
only Class 1 National Insurance should be the most relevant. This is collected
from the employee's gross pay as a statutory deduction and is calculated and
taken via the payroll software in place, through the Pay As You Earn (PAYE)
system in the UK. We will explore the PAYE system in detail in the coming
modules, but for now, PAYE allows employees to make their pay deductions on a
weekly or monthly basis, according to pay frequency, in order to avoid large
bills at the end of the tax year. National Insurance is one of these
deductions, which is required by law, and is taken automatically from wages by
the employer at the time of payroll system duties.
12.2 Potential Reasons Why An Employee May Pay Less
National Insurance Contributions
Whilst the vast majority of staff you employ within your
business will pay a standard rate of National Insurance on their earnings
through the PAYE system, there may be a few anomalies which crop up from time
to time, and you need to know how to deal with these situations and changes in
circumstance overall.
A reduced amount of National Insurance being paid is more likely
to occur within a large-scale business because there are obviously more people
to take into account and more circumstances to look into - whereas, in a small
business, there may be a few staff only, and potentially these will be
straightforward cases. Whichever situation you are in, these are some possible
reasonas why an employee may pay less National Insurance contributions.
A member of staff is a married woman who opted
into the reduced rate system prior to 1977, or a widow with a valid
'certificate of election'
Up until April 1977, there was a system in place whereby married
women could choose to pay less National Insurance contributions from their
earnings. Although still a statutory deduction, this reduced rate was called a
'small stamp'. Current information on the reduced 'small stamp' rate can be
found here. It is worth noting that it is not possible to opt into this
system now as it was abolished, but the agreement for those women who opted
into it at the time still stands and should be honoured by employers when
calculating deductions through payroll software before the full payment
submission to HMRC.
A member of staff has chosen to defer
paying National Insurance contributions because they are working more than one
job
If a member of staff has more than one job, they are able to
decide to defer paying their class 1 National Insurance contributions if they
pay them through more than one method of employment. Current guidelines on how
much National Insurance is paid in this situation are found here. This is a complicated situation for an employee in terms of
calculating the correct National Insurance, and in this situation, it may be
pertinent to seek further detailed advice from HMRC when the circumstance
arises.
12.3 Calculation and
Reporting to HMRC of Lesser NIC
As an employer, how do you
calculate and report to HMRC that an employee is paying less National Insurance
contributions than the standard rate?
The
usual answer will apply here: High-quality payroll software will do the
reporting for you. However, it is not that simple in its entirety, because HMRC
may ask to see evidence of why an individual is paying the amount of National
Insurance that you are deducting from their gross pay as a statutory deduction.
Each
reason why an employee pays less National Insurance will have been stated and
confirmed by HMRC. If a married woman opted into the 'small stamp' before 1977,
this will be confirmed by HMRC and written documentation available. Similarly,
if a member of staff is deferring their National Insurance contributions
because of working more than one job, documentation will need to be obtained
from HMRC.
HMRC
can call into question any part of your payroll system, including National
Insurance contributions, so ensuring you are making the correct calculations,
as well as having documentation to back up the reasons for these calculations,
is imperative in order to avoid problems in the future.
12.4 Record-keeping regarding NICs
As with anything else related to payroll, it is
important to keep up-to-date and accurate records in a safe and secure manner -
the same rules apply to anything relating to National Insurance.
HMRC can, as we have mentioned before, spot-check your business
at any time, and if there is a dispute over the amount of National Insurance an
employee is paying, you must have evidence to support these calculations and
deductions. HMRC-approved payroll software should ensure mistakes do not
happen, so any other reason for a change in the National Insurance contribution
rate should be retained in your record-keeping system and kept up to date if
the situation changes.
Of course, to reiterate this once more, a recordkeeping system
should be safe, secure, confidential, and only available to those who are
required to use the information as part of their job, and should always fall
within Data Protection guidelines. Back-ups and failsafe systems should be
developed to work alongside it.
12.5
Communication Issues in Relation to Changes in Circumstances
Any
change in employment circumstance should be reported to HMRC through your full
payment submission at the end of the pay period.
Back-up
evidence should also be kept in your record-keeping filing system. This is a
general rule of thumb you should apply to anything relating to your payroll
system. If you outsource your payroll duties, then changes should be
communicated regularly, accurately and without delay.
A
communication record should be kept in order to avoid misunderstandings and any
potential delays with changes being sent and actioned. (We have talked at
length previously about the potential upsets which can occur when communication
is not at the optimum level.) National Insurance is a statutory deduction and
therefore needs to be correct.
Because
there are limited reasons for an employee to be paying less National Insurance
contributions, rather than the standard rate, there should be less in the way
of relevant communication; other than changes in the working pattern or hours
worked. Of
course, National Insurance contributions are affected by the employee's
earnings, thus, if an employee drops their hours to part-time, they will pay
less National Insurance, as well as less income tax.
.svg)
