Class 1: calculating & recording earnings, NICs & NIC rebates: rates, limits, thresholds, rebates and P11 completion: 2000/01 background - changes to forms P11 and P14
Changes to forms P11 and P14 for April 2000 were driven by
- the introduction of a nil rate band for employees. Employees would no longer pay NICs on earnings up to and including a Primary Threshold or ‘PT’ (sometimes called the Employee’s Earnings Threshold or ‘EE/ET’) and;
- the need to clarify the information to be recorded by employers, particularly where NIC rebates are due.
NIMAppendix7(Gif 32kb) illustrates the headings for each column of form P14. An explanation of how each column for earnings, contributions and NIC rebates should be completed can be found within NIM11016. NIM11017 onwards, provides examples of how to calculate and record earnings, NICs and NIC rebates.
Employers who operate contracted-out pension schemes pay National Insurance contributions (NICs) at a reduced (contracted-out) rate. The difference between the full not contracted-out rate and this reduced rate is known as the ‘NIC rebate’.
Following changes introduced on 6th April 1999, employers pay secondary contributions only on those earnings above a Secondary Threshold or ‘ST’ (also known as the ‘Employer’s Earnings Threshold’ - ‘ER/EE’). Moreover, as a result of this change, employers operating contracted-out pension schemes have been able to make, from their overall NIC payments, a deduction to reflect the NIC rebate that would have applied to the employer’s contributions due on earnings above the Lower Earnings Limit (LEL), up to and including the Secondary Threshold. This is known as the “Secondary Rebate”
With the introduction from 6th April 2000 of a Primary Threshold, these arrangements were extended. From that date, a rebate would be due on earnings between the LEL and the Primary Threshold for employees. This is known as the “Primary Rebate”. Where the NICs due from an employee are reduced by this rebate to nil, any excess sum is available for the employer to offset against their wider NICs liability. The Deductions Working Sheet (form P11 or equivalent) for 2000/2001 allows for the recording of these figures:
- the rebate due on the earnings above the LEL, up to and including the Primary Threshold - i.e. the primary rebate - is recorded in column 1g; and
- the rebate due on the earnings above the LEL, up to and including the Secondary Threshold - i.e. the secondary rebate - is recorded in column 1h.
At the end of the 2000/01 tax year, the totals of columns 1g and 1h would be added together and recorded in box 1g/1h on the End of Year Summary (form P14 or equivalent).
Treatment of the primary NIC rebate calculated on earnings above the LEL, up to and including the Primary Threshold
The treatment of the primary rebate depends upon which of 3 possible scenarios is appropriate:
Scenario 1 - The amount of NICs actually payable by the employee is equal to or exceeds the amount of NIC rebate calculated
For example, where an employee in a Contracted-Out Salary Related (COSR) Scheme earns £100 per week, the relevant columns of form P11 are completed as indicated on the illustration shown in NIMAppendix6 (Word 27kb).
As the amount of employee’s contributions payable - column 1f - exceeds the amount of rebate recorded in column 1g, the amount in column 1g further reduces the employee’s contribution. (The amount shown in column 1h is available to the employer).
Scenario 2 - The amount of rebate calculated exceeds the NICs actually payable by the employee
Where an employee in a COSR scheme earns £77 per week, the relevant columns of form P11 are completed as indicated on the illustration shown in NIMAppendix6 (Word 27kb). As the amount of rebate calculated and shown in column 1g exceeds the employee’s contributions payable - as shown in column 1f - the employee’s contribution is further reduced by £0.08, and the remaining £0.06 is available to the employer. (The amount shown in column 1h is available to the employer).
Scenario 3 - No NICs are payable by the employee
Where an employee in a COSR scheme earns £69 per week, the relevant columns of form P11 are completed as indicated on the illustration shown in NIMAppendix6 (Word 27kb). As there are no employee contributions payable, the whole of the amount calculated and shown in column 1g is available to the employer. (The amount shown in column 1h is available to the employer).
Note: Although a COSR scheme is used in the illustrative examples for each scenario, the same principles apply if the employer is operating a Contracted-out Money Purchase (COMP) scheme.
The effect of the primary rebate on an employee’s salary/wages
The effect of this will be that when the NICs due on earnings between the Primary Threshold and the UEL have been calculated, the primary rebate due on earnings from the LEL up to the Primary Threshold, will further reduce the NICs payable and therefore the Primary Rebate will be reflected in the employee’s pay. As such, it will be taken into account for the purposes of Attachment of Earnings Orders or, in Scotland, Arrestment of Earnings Orders, and Deductions from Earnings Orders made by the Child Support Agency.
When the primary rebate is not applicable
The primary rebate is only applicable to NICs paid at Categories D and F. There is no primary rebate due where the employee is paying contributions at the married women’s reduced rate, Categories E and G. This is because the contracted-out and not contracted-out percentage rates are the same at the married women’s reduced rate. Similarly, where ‘employer only’ contributions are due because the employee has been granted deferment, i.e. where contributions are due at Category C contracted-out or Category S, again, there is no primary rebate due.
Completion of forms P11 and P14 for 2000/2001
Even though the amounts shown in columns 1g and 1h will have been deducted from the overall NICs bill, on no account should the values shown in columns 1e and 1f have been reduced by those amounts when forms P11 and P14 were completed.
Effect of this revised guidance on SSP/ SMP
The amount of rebate to be taken into account for the purposes of Small Employer’s Relief (for SMP) and the Percentage Threshold Scheme (for SSP) is the combined total of the primary and secondary NIC rebates recorded in columns 1g and 1h of form P11. For SMP, the total is for the relevant year and for SSP, for the relevant tax month.