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HMRC internal manual

Decisions and appeals for National Insurance Contributions and Statutory Payments

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Notices of decision: Wording of National Insurance contributions liability decisions: Example of calculating unpaid Class 1 National Insurance contributions due on earnings above the upper earnings limit

DANSP31000 provides general information about calculating Class 1 National Insurance contributions (NIC) liability where the NIC due is more than the NIC paid and the unpaid NIC are due on earnings above the upper earnings limit (UEL). The example below illustrates how to calculate Class 1 NIC in such cases.

Example

Facts

A director who has paid Class 1 NIC on earnings above the annual UEL in the 2005/06 and 2006/07 tax years, receives in each tax year, a payment of earnings on which no NIC have been paid. The company and director do not consider the payments are earnings and that no additional Class 1 NIC are due. HMRC considers that the payments are earnings and Class 1 NIC are due. The company confirmed that the director’s earnings included in gross pay for both years exceeded the UEL. An annual earnings period applies to both tax years.

End of year returns (P14) show

Tax year NIC table letter Total NIC paid (£) Total of employees NIC paid (£) Pay in this employment (£)
         
2005/06 A 14,361.97 3,683.83 87,687
2006/07 A 15,548.48 3,832.51 95,899
Totals 29,910.45 7,516.34    

Calculating the NIC liability amount for the decision

The director’s pay far exceeded the UEL. If you checked the employees NIC paid it is at least equivalent to the primary NIC due on earnings up to the UEL, so as the company confirmed that the directors earnings included in gross pay for both tax years exceeded the UEL, it is safe to assume that the director has paid primary NIC on earnings up to the UEL.

Class 1 NIC due on payments not included in gross pay

Tax year Earnings not included in gross pay (£) Secondary NIC due at 12.8% (£) Primary NIC due at 1% (£) Total NIC (£)
         
2005/06 125,000 16,000 1,250 17,250
2006/07 150,000 19,200 1,500 20,700
Totals 35,200 2,750 37,950  

Class 1 NIC liability amount to enter on the notice of decision is £67,860.45, calculated as shown in the table below.

Tax years Total NIC paid - on P14s (£) Total NIC due on earnings not included in gross pay (£) Total NIC (£)
       
2005/06 & 2006/07 29,910.45 37,950 67,860.45