12% NI automatically deducted from protective award payment

Workerbee999

I am due to receive this payment shortly. Ex colleagues who have already received theirs have confirmed that 12% NI is automatically deducted before the payment is made.

 I understand NI is payable, but due to my regular salary levels I am above the 12% threshold and only pay 2% NI on incremental income. 

Does this mean I can claim back the 10% difference? And if so, how do I do it as online tax accounts only deal with income tax?

Thanks 

molerat

https://www.gov.uk/claim-national-insurance-refund

jimmo

What is a protective award payment and who is paying it? 

If it is some kind of provisional payment, perhaps pending final negotiations or determination, it is not unusual for the payer to cover their own back and calculate the maximum possible tax and NIC. Then, when the final payment is determined and processed through payroll, the correct tax and NIC should replace the provisional figures and you would get any overpayment back.

[Deleted User]

When one is to be made redundant they are supposed to be part of the consultation process with their employer. If that doesn’t happen an employment tribunal may make a compensatory award. This is known as a protective award payment.

I have had some experience of this and am fairly certain that tax is deducted at 20% from that payment which can be reclaimable. NIC is also levied at a flat 12% rate but this is not able to be reclaimed unless your earnings fell below the lower earnings limit or you were otherwise exempt from NIC.

jimmo

Thanks Purdy. It sounds rather like the Gourley Principle.
 EIM13070 - Employment Income Manual - HMRC internal manual - GOV.UK (www.gov.uk)
If so, its not real tax or NI. More just a way of calculating a figure, so it would be down to re-negotiating with the employer or back to the employment tribunal.

[Deleted User]

jimmo said:

Thanks Purdy. It sounds rather like the Gourley Principle.
 EIM13070 - Employment Income Manual - HMRC internal manual - GOV.UK (www.gov.uk)
If so, its not real tax or NI. More just a way of calculating a figure, so it would be down to re-negotiating with the employer or back to the employment tribunal.

Yes - I wouldn’t just be as hopeful on the NIC part - always more difficult in my experience. I always thought that this was a strange approach to deduct both NIC and tax given that it is regarded as a compensatory payment, not emoluments, but is treated exactly as if it were.

Jeremy535897

[Deleted User] said:

jimmo said:

Thanks Purdy. It sounds rather like the Gourley Principle.
 EIM13070 - Employment Income Manual - HMRC internal manual - GOV.UK (www.gov.uk)
If so, its not real tax or NI. More just a way of calculating a figure, so it would be down to re-negotiating with the employer or back to the employment tribunal.

Yes - I wouldn’t just be as hopeful on the NIC part - always more difficult in my experience. I always thought that this was a strange approach to deduct both NIC and tax given that it is regarded as a compensatory payment, not emoluments, but is treated exactly as if it were.

It's because the compensatory payment is intended to put the claimant in the same position as if nothing had happened. If it is to replace lost income, that should be based on the net of tax and NI sums the claimant would have received. It sounds as if they have not been correctly calculated.

Workerbee999

Hi and thanks

the protective award will be paid by a Gov department (not sure which, maybe the NIC fund) , because my employer became insolvent so the max payment would be 8 weeks x £525 instead of what my salary was. 

What you said makes sense, that it’s more like a notional NI deduction to compensate for the net that should have been paid rather than an actual NI payment, so it doesn’t sound like I would be able to claim back the difference. Although I would have thought in that case that it would only be applied to the amount above the LEL if it was assuming to replicate a weeks pay, or otherwise allow the excess at the 2% limit to be applied at that rate, rather than applying 12% to all of it, as that way it doesn’t seem to be consistent - it is neither replicating a weeks notional pay, or treating it as current earnings.

My understanding is that income tax will not be applicable (and therefore if it is automatically deducted I can claim it back) because the award will be paid in a different tax year to when the insolvency happened so it is not treated as earned income- can anyone confirm that?

Jeremy535897

If the calculation of a deduction for NI is notional, so is any deduction for income tax.

As a separate matter, if a payment of wages subject to tax and NI is made in a tax year after the employment ceased, it is still taxable.

jimmo

I fear we may be talking at cross purposes here. The Gourley principle is a long established method of determining the amount a person has lost as a result of their employer's failure. So, to determine the amount lost it is necessary to calculate what would have been their correct net pay. In other words "How much tax and NI would you have suffered if you had been paid at the correct time?" The date the compensation is actually paid to you does not come into this particular calculation.

Next, the government is going to pay your compensation, not your employer. Here there are clearly rules which are beyond my knowledge and you say the compensation will be limited to (8 weeks at £525) £4,200.

The big thing I don't understand is that you say NI at 12% will be deducted (Purdyoaten 2 says 20%tax and 12% NI) but what will it be deducted from? Is it deducted from what would have been your correct gross pay instead of the deductions which would have been correctly made?

If it is and the net result is a figure in excess of £525pw then whilst it could be wrong n principle it would make no difference to the amount to be paid to you now.

If it is to be deducted from the calculated compensation that makes no sense to me but could, of course, be in line with any rules for the government department which is due to pay you.

 

Now, so far I have been talking about how the compensation you are due is calculated. Neither the tax nor the NI are real, they are just methods of calculation and if you disagree with the figures used you will need to argue with the paying department.

Just to complicate things even further,  when the compensation is paid to you it is actually taxable as a termination payment in connection with the termination of your employment. NIC is not chargeable on termination payments but tax is, subject to exemption of the first £30,000.

Therefore unless you received more than £25,800 in redundancy monies no tax or NI should be deducted from the compensation payment. If it is you would be able to claim repayment from HMRC but that is only in respect of the real tax and NIC deducted, not the figures of tax and NIC used in the calculation of the compensation.

[Deleted User]

This may help - under ‘How much will you pay me.?’

Far be it from me to question jimmo, or to be pedantic, but, before someone else mentions it, I am fairly sure that PILONs are NICable. 

https://www.gov.uk/government/publications/explaining-your-protective-award/explaining-your-protective-award