Errors in good faith: recovering NICs

INTERNET GUIDANCE PAGERecovering underpayments of National Insurance contributions fromyour employees where an error in good faith has occurredBackgroundParagraph 11 on Page 17 of booklet CWG2 covers situations where an employerdiscovers that the correct amount of primary National Insurance contributions (NICs)has not been deducted from an employee’s earnings because of an error made bythe employer in good faith.It explains that where that error results in an underpayment of primary contributions,the employer has the right to recover the underpayment from the employee withincertain limits. This note provides further detail about how and when such a recoverycan be made.What is an error in good faith?An error in good faith is not defined in Social Security law. As a result HMRC willnormally accept that errors in good faith are those involving genuine mistakes wherethe employer has proceeded with an honesty of intention when assessing the amountof NICs due. Good faith errors can include misunderstandings, mistakes of procedureand human error. The important consideration is that the mistake occurred at thetime the earnings were paid and that the employer was genuinely unaware that hewas making a mistake.A deliberate failure to deduct NICs on certain types of payments, or the overturningof a previous decision not to deduct primary NICs from an employee’s earnings arenot errors in good faith. Although it is impossible to list every good faith error that canoccur, the following are among the most common:• using out of date NICs percentage rates, limits or thresholds• deducting the wrong Class of NICs, for example paying Class 1A instead of Class1 on a particular item of pay• deducting the wrong category of NICs, for example deducting contracted-outNICs for an employee who is not included in the employer’s contracted outpension scheme.• arithmetical errors where either manual calculations were needed or wherepayroll data was input incorrectly• delays in notifications, for example, where one section delays notifying the payrollsection of a change in the employee’s circumstances,How is the underpayment recovered?The underpayment can be collected from extra deductions taken from later paymentsof earnings made to the employee after the error has been discovered. Twoconditions are applied to the recovery. These concern the amount that can berecovered and the length of time over which the recovery can be made.

1. The amount that can be recoveredThe extra NICs deductions can be no greater than the NICs deduction which is dueon the earnings that are about to be paid.ExampleAn employee’s share of NICs on a payment of earnings which is about to be made is£30. The maximum extra deduction that can be made from that payment is also £30,making a total deduction from those earnings of £60.2. The length of time over which the recovery can be made.The extra deductions can be made from any earnings paid to the employee duringthe remainder of the tax year in which the error was discovered and before the end ofthe next tax year.ExampleAn employer discovers a good faith error on 28 th February 2007. He may make extradeductions from any earnings paid to the employee during the period 1 st March 2007to 5 th April 2008. This means he has the remainder of the 2006/2007 tax year andthe whole of the 2007/2008 tax year in which to recover the underpayment.What should be reported on End of Year returns?It is important to remember that, even if the employer needs to extend the recoveryperiod into the second tax year, the contributions actually due for the year in whichthe underpayment occurred must be paid to HMRC at the correct time and must berecorded on the employee’s End of Year Summary (form P14) for that year.ExampleAn employer holds a valid ‘certificate of election’ which authorises him to deductcontributions at the reduced rate for a female employee. The employee is divorcedon 28th April 2006 and becomes liable to pay contributions at the full standard rate.The employer has in place arrangements for employees to notify changes to theirmarital status but, whilst the employee complies with these, the notification getsmislaid en route to the payroll department and it is not acted upon until July 2006.As a result, an underpayment of primary contributions occurs during the periodbetween the employee’s divorce and the date the payroll section received thenotification. Since the error giving rise to the underpayment was made in good faith,the employer can, if necessary, recover the underpayment from any further earningspaid to the employee in the remainder of the 2006/2007 tax year (Year 1) and thefollowing year, 2007/2008 (Year2).The employer must pay over the full amount of primary NICs due by the end of the2006/2007 tax year and ensure that the 2006/2007 End of Year Return for theemployee shows the correct NI due for that year, whether or not any remainingunderpayment continues to be collected during 2007/2008.What if an employer is unable to recover the full amount by the end of thesecond tax year?If the employer is unable to recover the full amount by the end of the second taxyear, the employer has to bear the cost of the balance himself.

Points for employers to remember:• correct any wrong entries on the employee’s Deductions Working Sheet (formP11 or equivalent) for Year 1. Advice on how to do this is given in Helpbook E13,Day-to-day payroll• ensure that contributions at the correct rate are deducted from any furtherearnings paid to the employee• start to recover from the employee the amount underpaid. Remember that theextra deduction to be made from any further earnings can be no greater than theemployee’s contribution due on those earnings• even if the amount underpaid is not recovered by the end of Year 1, ensure thatthe contributions actually due for that year are both paid to HMRC and recordedon the employee’s P14• in Year 2, continue to recover any remaining underpayment from further earningspaid to the employee but do not show any further recovery made in Year 2 on theemployee’s P14 for Year 2• if unable to recover the full amount underpaid by the end of Year 2, the employerhas to bear the cost of any amount unrecovered.

GUIDANCE FOR THE CWG2 – REPLACEMENT FOR PARA 11Recovering underpayments from your employeesThe position on recovering underpayments from your employees is as follows.For NICs purposesAs a general rule, you as the employer have to pay any underpayment of NICsarising from an error.If the error was made, for example, in the current tax year you must:• correct any wrong entry on the employee’s Deduction Working Sheet (formP11 or equivalent)• record on form P14, End of Year Summary, the contributions that areactually due, not those wrongly deducted• pay the amount actually due.However, there are special rules which allow you to recover underpayments fromyour employees where the error was made in good faith.This is done by making extra deductions from any later earnings you pay thatemployee. There are two conditions that apply to these recoveries.1. The extra deduction you can make from any further payment of earnings canbe no greater than the employee’s contribution due on that further payment ofearnings.ExampleAn employee is due to pay primary contributions of £20.00 on his nextpayment of earnings. The maximum extra deduction that can be made is£20, making a total deduction on those earnings of £40.2. The extra deduction can be made during the remainder of the tax year inwhich the error was discovered and the whole of the following tax year.ExampleAn employer discovers an error was made in good faith on 31 st May 2006. Hemay make extra deductions from any earnings paid to the employee duringthe period 1 st June 2006 to 5 th April 2008 until the underpayment is recovered.If at the end of the second tax year you have been unable to recover the full amountunder-deducted, then you may not recover any more from the employee and youmust bear the cost of the loss yourself.Further information and examples of good faith errors can be found on the HMRevenue & Customs Website at www.hmrc.gov.uk/employers/recovery.htm.Guidance on how to amend your payroll records is available in Helpbook E13 (2006)Day-to–day payroll.For PAYE purposes[same text to be retained]

GUIDANCE FOR THE E13 – REPLACEMENT FOR PARAGRAPH HEADED“RECALCULATING NICS FOLLOWING CHANGES”:Recalculating NICs because of a change in circumstances or an errorSubject to special rules explained below, if you do not deduct the correct amount ofNICs at the proper time because of a change in the employee’s circumstances orbecause you discover an error has been made in good faith, you can:• recover any underpaid NICs by making extra deductions from later earnings• refund any overpaid NICs.The action you take will depend on whether you will be making adjustments to NICsfrom:• a current date• a previous date- within the same tax year, or- in a previous tax year.and whether the adjustment:• results in an under or overpayment of NICs• involves a change in the contribution Table letter that you have been using.Adjustments that are made from a current date will not involve either an under oroverpayment of NICs but they will normally require a change in the contribution Tableletter – for example, an employee reaches state pension age.Adjusting NICs from a current dateIf you are adjusting the NICs from a current date using a paper P11 DeductionWorking Sheet:• draw a line across the P11 columns 1a to 1e under the last entry for theoriginal contribution Table letter and begin entering the new contributiondetails, including the new contribution table letter, on the next available line• enter the totals of columns 1a to 1e up to the date of change in the boxesnext to the entry for the original contribution Table letter in the ‘End of YearSummary’ section on page 2 of P11• enter the new contribution Table letter on the next line of the ‘End of YearSummary’ section.If you are using the P11 Calculator on the Employer CD-ROM• go into the employees’ details in the employer database and change the NITable letter.Adjusting NICs from a previous date within the same tax yearIf you are adjusting the NICs from a previous date within the same tax year using apaper P11 Deduction Working Sheet, amend the P11 by:

Further helpFor further help on what to do if a mistake is discovered during the tax year or after ithas ended see the CWG2, Employer’s Further Guide to PAYE and NICs, underMistakes in amount of NICs or PAYE. Further information on what counts as an errorin good faith can be found at www.hmrc.gov.uk/employers/recovery.htm