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National Insurance Contributions 2004/05

H M Revenue & Customs recently admitted that letters have been sent out in error to what could be as many as 700,000 taxpayers advising them of underpayment of National Insurance for 2004/05. The letter invites the taxpayer to make up the shortfall. If you receive one of these letters please do not send any money but refer it to your tax adviser.

Revenue say the error has occurred as a result of the annual National Insurance returns not yet being processed or errors having been made by employers. It is worrying that in December 2006 Revenue is still processing annual returns for 2004/05!

Please call us if you need any further advice on this or if we can help with any aspect of year end returns becoming due in 2007.

Updated 18/12/06

PAYE and National Insurance Inspections

We are seeing an increasing number of PAYE and NIC inspections and nationally some of the fines and back-charges are quite staggering. We offer a full PAYE and NIC audit for all clients, but this may be especially apt for those not using our payroll services.

Did you know?

• If staff gain an award from a third party you are responsible for paying 12.8% NIC on this benefit (unless the third party makes specific arrangements to pay this directly).
• If you make awards to staff members you could be responsible for paying employers NIC - Class 1 if it were (say) vouchers or Class 1A if a bottle of whisky.
• The self-employed pay NIC at 1% on earnings above £30,940.
• Director’s start paying NIC when their cumulative pay in a tax year reaches the annual Lower Earnings Limit BUT if they leave within a tax year their NIC contributions may need recalculating.

Updated 21/07/05

One employer - 2 jobs

If you employ people in more than 2 roles, but pay them separately, you have to aggregate their wages when computing NIC liabilities. There is an overall maximum limit of 53 weeks contributions.

Two employers - 2 jobs

If you have two jobs or a mixture of employed / self-employed work then provided a maximum of 53 weeks contributions are made in the year you can apply for a deferment of contributions on one income so as you are exempt for NIC.

The 1% NIC contribution

Employees (and employers) have higher NIC deductions caused by the rise in NIC rates. However, the 1% isn't a raise in rates but an extra NIC charge on both employees and employers and for which there is no upper limit on the 1%.

NIC on PAYE and Self-employed incomes?

If you earn the Upper Earnings Limit under PAYE you can apply NOT to pay additional Class 4 NIC on self-employed earnings by having these deferred. The onus is on you to apply, or if we look after you, we will undertake this on your tax return computation. This does not apply to the 1% contributions.

NIC on share options

A summary:

Note that employees are liable to Class 1 NIC IF they earn below the Upper Earnings Limit up to the UEL threshold.

There are current considerations to charge employers NIC even if the granted UK employee has lived and worked abroad for up to 10 years but was paying NIC at the time of an option grant. This is likely to go to Court in introduced as the new resident country may also charge taxes on the option gain, which could introduce double-taxation.

NIC Penalties

From April 2001 there can be a £50 fine multiplied by the number of pay-rolled employees on the year end return if there is a "significant" number of missing NIC numbers. Thus the employer will be held liable for errors and omissions of NIC numbers.