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Calculations for the deferment of National Insurance contributions used to be pretty straightforward, but then they brought in the 1% rate in April 2003.
The easy going and predictable flow of the financial equivalent of the children’s television show Play School seemed to have become the exciting maelstrom of Brian Cant’s Play Away.
More than that, Class 4 deferment calculations had become the ugly Hamble doll to Humpty’s amiability. Apparently, few of the Play School presenters liked Hamble either.
She used to be drop kicked across the studio, and presenter Chloe Ashcroft admited, ‘I did a terrible thing to Hamble. She just would not sit up ... so one day I got a very big knitting needle, a big wooden one, and I stuck it right up her bum, as far as her head’.
Hopefully this article will negate any such tendencies that you may have felt about post-2002/03 deferment calculations. I think Johnny Ball and Floella Benjamin would have shown restraint towards Hamble (Floella is a baroness now after all), but almost certainly not wild Brian.
So today, as I seem to recollect that it was disappointingly the least used of the three, we are going to go through the arched window.
Basic principles
In brief, unlike income tax where ‘the more you earn, the more you pay’, there is an annual maximum amount of National Insurance contributions that are payable.
Where an ‘earner’ only has one employment the operation of the PAYE system will ensure that no more than the maximum amount is paid.
However, where there is more than one employment or where there is employment and self employment the payment of Class 1 contributions on two employments or the payment of both Class 1, Class 2 and Class 4 contributions may mean that excessive amounts are paid.
Excess payments can be repaid after the year end once the actual position becomes clear; alternatively the ‘earner’ may claim that the payment of National Insurance contributions on one or more sources of income can be deferred.
Any shortfall will then have to be paid once the correct position is calculated after the year end.
Having said that, perhaps we should remember that only the employee contributions are relevant, because employers’ contributions will still be due where appropriate regardless of deferment. Also, only the primary rate contributions (i.e. 11% for Class 1 and 8% for Class 4) can be repaid or deferred.
For determining the maximum, the NIC Regulations treat Class 1 contributions as being paid at the main rate even where a lower rate is paid such as by married women, or contracted out (however the actual amount to be repaid in these cases is at the lower rate).
If a deferment leaves an underpayment, then arrears are due within 28 days of a demand.
Most of the rules are within the Social Security (Contributions) Regulations SI 2001 No 1004 (SSCR 2001), and references to Regulations (Regs) in this article refer to these unless otherwise indicated.
Rates used are for 2010/11, but please be aware of changes in rates applying from 6 April 2011, mainly as follows.
- The primary Class 1 rate becomes 12% on earnings between the earnings threshold (ET) and upper earnings limit (UEL).
- The primary Class 4 rate becomes 9% on profits between the lower and upper annual profits limits.
- Contributions over the upper earnings/profits limits for both Class 1 and Class 4 become 2%.
- Band thresholds will not be fixed until September’s RPI is known – but alignment of the upper profits/earnings limits with the 40% threshold will be maintained (i.e. reduced, as the Tories will reduce the basic rate ceiling), and the 2009 Pre-Budget Report had indicated an additional rise in the lower profits/earnings limit of £570.
Class 1 deferment
As mentioned, if you have more than one job then you may pay more Class 1 NIC than is required. In this case a deferment arranged in advance is possible; or else a repayment can be claimed after the end of the tax year.
Ideally, deferments should be made before the beginning of the tax year, but applications can still be made up to the 14 February within the tax year itself.
These ‘late’ applications can only be considered with agreement between the employer and the National Insurance Contributions Office (NICO).
Application for deferment is made on form CA72A and must be made each year. If a deferment is agreed then HMRC’s Deferment Services department will notify the employer on form CA2700.
However, deductions at 1% on earnings over the upper earnings limit are still due as these are not subject to any maximum. If NIC deductions have already been made during the tax year in question when deferment is granted then these can be refunded by the employer, and booklet CWG2, Employer Further Guide to PAYE and NICs, gives further instructions.
The maximum contribution for any year is given by Reg 21(2)
(as amended by the Social Security (Contributions) (Amendment) Regulations SI 2003 No 193, Reg 6), and HMRC’s National Insurance Manual at NIM01163 also reproduces this step by step calculation method.
Box 1 reproduces the steps, with an example of two employments of £50,000 and £15,000.
Against the maximum calculated via the steps in Box 1, the total deductions from each employment are then compared and excess deductions can then be reclaimed. In this case, actual deductions without deferment would be £5,280, with a deferment saving of £855.
If the total band earnings that would individually fall between the PT and the UEL on combined employments comes to more than the UEL, then steps 4 and 5 charge the 1% additional rate on that balance.
Steps 6 and 7 also charge the 1% on earnings from any one employment (taken in isolation) that exceed the UEL; but there is no double charge on that slice as step 3 has excluded that top slice from inclusion in steps 4 and 5. If no single employment exceeds the UEL then Steps 6 and 7 will be nil.
But for the 1% aspect, one could say that the Class 1 maximum is £4,279, and that figure is a good rule of thumb. Before 6 April 2003 when the additional 1% rate came in (briefly called the ‘NHS levy’, though I don’t believe that it was ever hypothecated to the NHS), there were flat maximums for Classes 1 and 4 (go and look at your old Whillans’s Tax Tables).
For a concurrent two-employment situation, deferment won’t be relevant unless total earnings are at least £50,350 (and earnings on the lower employment need to be at least £6,500).
Where there are two or more employments, each employer will normally calculate NICs without reference to any other employment. But where employments are with a ‘linked’ or related employer then Reg 15 indicates that earnings can be aggregated for NIC calculations.
The National Insurance Manual at NIM10010 indicates that association is not defined, but NICO will consider whether businesses have a common purpose, shared facilities, personnel, customers, etc.
Class 2 deferment
Where Class 1 and Class 2 contributions are paid, there is also the potential to overpay Class 2. Reg 21(1)(b) indicates that the Class 2 maximum is calculated in exactly the same way as that above.
Form CA72B is used to claim deferment of Class 2 contributions. Claims for deferment can be made right up to 5 April within the tax year in question.
You do not need to defer if self employed earnings would anyway be under the small earnings exception given in SSCBA 1992, s 11(4) (earnings less than £5,075 for 2010/11), though you would still need to apply for exception or refund in this case.
Class 4 deferment
Again, there must be Class 1 employment before deferment can be relevant. Remember that unlike Class 1 where each employment receives the benefit of the primary threshold without aggregation, for Class 4 all profits are aggregated (SSCBA 1992, s 15 and s 18). As for Class 2, form CA72B is used for deferment claims.
Each step of the calculation of the maximum is given by Reg 100, as amended by Reg 14 of SI 2003 No 193 from 2003/4 (see Box 3).
The first four steps are easy (determining main rate maximum NICs), but then you need to take a deep breath, as progress along the next five steps (determining any 1% balance) is determined by which of three cases your result from the first four steps falls into: namely whether Class 4 is due at 8% only (case 1, and no deferment being due); due at a mixture of 8% and 1%
(case 2); or at 1% only (case 3).
Depending on the amount of profits, Case 1 should apply only on Class 1 earnings up to £19,040 or less; Case 2 when the earnings are between £19,040 and £33,500; and Case 3 will always apply when the earnings are more than £33,500.
Having a third case makes it look more complicated than it is, as steps in Cases 2 and 3 are identical except that Case 3 gives a figure of ‘nil’ at steps four and five. HMRC explanations and examples are in the National Insurance Manual at NIM24176 to NIM24185.
Steps one to three determine the theoretical maximum NIC’s at primary rates for Class 4 and 2, which would be £3,180. From this maximum, subtract any primary rate Class 1 and Class 2 actually paid for your step four result.
If the step four result is positive, i.e. if primary Class 1 and Class 2 NIC’s paid are less than £3,180, then look at Cases 1 and 2 as some Class 4 at 8% will be due. If Case 1 is in point, then you stop at step four ignoring steps five to nine, and the step four answer is the Class 4 ceiling.
If your positive result instead gives you Case 2 then you continue along steps five to nine. Steps six to nine establish those profits falling within the lower and upper profit limits, and those that are above the UPL.
If the result of your step four answer was negative then you have ‘Case 3’ when primary Class 2 and 1 NICs paid exceed £3,180.
What you have paid already exceeds the maximum Class 4 and 2 due at the main rate. You should be due a repayment (or be deferring), but how much depends on steps five to nine.
For Case 3 treat your step four/five answer as nil. When there is a single employment involved, then Case 3 will apply for employment earnings above £33,500. (Class 1 NIC would be 11% on £33,500 – £5,715 = £3,056. Adding 52 weeks of Class 2 NIC of £125 gives a total of £3,181.
This would be more than maximum Class 4 of 8% on £43,875 – £5,715 = £3,053; plus 53 weeks of Class 2 NIC of £127.20 giving a total of £3,180.) Figures will be marginally different were there are 53 contribution weeks in a year.
There are myriad possible answers, but as a guide Box 4 gives the outcomes of various income combinations for self employments with a single employment, and the deferment savings available.
Effect on state benefits
Where you have deferred (or been refunded) Class 1, 2 or 4 contributions, there is no harm to state pension or state second pension (S2P) rights.
This is because to have a deferment in the first place sufficient Class 1 will already be due to be able to meet the basic state pension entitlement threshold for that year, and Class 1 band earnings will exceed the maximum that counts toward S2P.
Class 2 contributions do not count towards state second pension rights, and Class 4 contributions do not count at all towards state benefits. (See Dropping a clanger.)
Exceptions and miscellaneous
While there is a time limit for refunds of contributions paid ‘in error’, there is no time limit for refunds of contributions paid in excess of the maximum.
The National Insurance Manual at NIM37003 confirms this distinction and that there is no time limit for refunds of Class 1 paid above the maximum, and NIM38504 confirms the same HMRC view for Class 2 and Class 4.
Note also that for Class 2 exceptions (i.e. where profits are below the de minimis), Reg 47(2) decrees that the time limit for refund claims is 31 January following the year of assessment.
Bear in mind that certain persons may have an exception from paying National Insurance anyway. For instance, for Class 4 , Reg 93(1) and Reg 93(4) respectively grant exception to any person who at the beginning of a year of assessment is over pensionable age, or under 16.
Contrast this with Class 1 and Class 2 – respectively under SSCBA 1992, s 6(1), s 6(3) and s 11(1) – where the exception/charge will apply from the moment someone reaches the critical age.
For certain trades, particularly theatrical engagements, special arrangements are in place whereby Class 1 is deducted from income that is reported as part of self-employed profits (and usually where tax code NT – ‘no tax’ – is applied to those earnings).
An adjustment is required on the tax return to the
Class 4 calculation to avoid any double charge in the first place.
So, now you can put away the big wooden knitting needle. Please.
Rob Durrant-Walker CTA, is a tax manager with UHY Calvert Smith in York and can be contacted by email. The views expressed are those of the author and not necessarily those of UHY Calvert Smith or the UHY Hacker Young Group.
