Errors in good faith: recovering NICs

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.