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HMRC internal manual

Compliance Operational Guidance

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HM Revenue & Customs
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Supporting Guidance: employer compliance: guidance by subject: computations: estimating earnings for NICs purposes

Estimating earnings for National Insurance Contributions purposes can have an effect on an individual’s entitlement to pension and state benefits. It is therefore important that earnings are calculated as accurately as possible to ensure the NICs due on them is posted to the individual’s NI account on NPS (COG908095).

However there will be situations where you may spend a great deal of time in calculating the earnings only to find the resultant posting of NICs has little or no effect on the individual’s future entitlements.

Estimates of earnings are not appropriate if records are available and where employees’ earnings may fluctuate around the lower earnings limit (LEL) for NICs. These earnings must be accurately determined wherever possible as there is a risk of those employees losing entitlement to benefits and credits if their earnings are incorrectly shown to be below the LEL.

In deciding whether to estimate earnings for NICs purposes, you should consider the following:

Is it impractical to establish the exact earnings because of the number of employees, see COG908092 or the type of payment involved?

  • If the answer is NO you must do an exact calculation.
  • Note: By impractical we mean that to do an accurate and individual calculation would be difficult or time consuming because of the payroll and/or accounting systems are complicated or numerous employees or payments are involved.

Do the extra earnings take any employee’s total earnings for the pay period up to or over the Lower Earnings Limit (LEL)?

  • If the answer is YES, those employees affected must be excluded from any estimation.
  • Note: Where additional earnings take an employee’s total earnings for the pay period over the LEL there is potentially a significant impact on qualifying years as such earnings may

    • increase an individual’s future entitlement to the Basic State Retirement Pension, or
    • earn entitlement to other State Benefits.
  • Where there may be a significant impact, you must

    • carry out exact calculations of earnings, or
    • ask the employer to provide details of earnings.

Current Year

See also COG906500 onwards.

Where Class 1 arrears are restricted to the current year you should

  • not consider an estimate
  • instruct the employer to

    • submit a Full Payment Submission (FPS) to report the correct year to date position, see COG904250.