National Insurance Contributions

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It's surprising that you hear little about how nearly everyone (including employers) will have overpaid National Insurance at some point and can't claim it back.

Unlike Income Tax, National Insurance contributions (NIC's) for the majority of employees are calculated on a payment period basis instead of an annual cumulative basis.

NIC's are automatically deducted (PAYE) from a salary payment by the employer.

The payment period depends on how often the employee gets paid (typically weekly or monthly).

If an employee earns extra in one month they'll pay extra National Insurance.

They won’t be able to claim the extra back, even if their pay is lower during the other months of the tax year.

The lowest paid are likely to be the most affected, since irregular payments can result in NIC's being deducted when one might expect the payments to be exempt.

(Although anyone who has only been able to work for part of a tax year will potentially have overpaid NIC's)

For example:

Earnings up to £242 per week (£1,048 per month, £12,570 per year) have a zero percent NI primary contribution rate.

Someone could work for 52 weeks at £242 per week without any NIC deductions from their salary payments.

Another person who earned £484 per week and only worked for 26 weeks in a tax year would instead see a total of £755.04 NIC deducted.

Their annual incomes would be the same (£12,570), but the person who worked for half of the year would have NIC deducted (12% on £242, £29.04) from each of the 26 salary payments.

In addition, their employer would have to pay an extra £627.85 in NI secondary contributions (£480.79 -> £1,108.64).

The second employee takes home £755 less and the government receives an extra £1,382 in National Insurance contributions.  

Company directors who receive irregular earnings can be treated as having an annual earnings period but that doesn't apply to other employees.

The self-employed will also be assessed for National Insurance on an annual basis via their Tax Return.

(In fairness, there's a downside to NIC being calculated on an annual cumulative basis, due to NIC thresholds the amount of NIC deducted can rise and fall significantly from one payment to the next)

The government expects to receive £157Bn of NIC's for 2022-23 and is perhaps satisfied with the situation, but it would be fairer to calculate all National Insurance contributions on an 'annual cumulative' basis.

"Why don't people claim a refund?"

A fair point - in theory it's possible to claim a National Insurance refund.

Alas, irregular periods of employment are not a valid reason to be assessed on an annual cumulative basis and the claim will be rejected.

On the flip side, it's possible to 'game' the situation by having multiple part-time jobs.

For example:

A person who has two jobs and earns £242 per week in each (a total of £25,140 per year) will have no NIC's deducted by either employer.

If you were trying to devise a 'National Insurance' scheme to cover pension, healthcare and social care costs...you'd probably not base it on the current one.

Comments

  • MattMattMattUK
    MattMattMattUK Posts: 8,792 Forumite
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    It is not an overpayment, it is a payment according to the rules of the scheme.
    If you were trying to devise a 'National Insurance' scheme to cover pension, healthcare and social care costs...you'd probably not base it on the current one.
    One would certainly not, but any attempts at sorting the system out would be politically difficult at best, most of the public have little understanding of taxation and are not willing to try and understand it.
  • p00hsticks
    p00hsticks Posts: 12,981 Forumite
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    edited 26 April 2023 at 10:53AM
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    On the flip side, it's possible to 'game' the situation by having multiple part-time jobs.

    For example:

    A person who has two jobs and earns £242 per week in each (a total of £25,140 per year) will have no NIC's deducted by either employer.

    If you were trying to devise a 'National Insurance' scheme to cover pension, healthcare and social care costs...you'd probably not base it on the current one.

    Some with multiple part-time jobs benefit, but others lose out big time - change that £242 figure to £122 (a pound below the lower earnings limit) in any single job, and the worker indeed doesn't pay NI, but also doesn't get NI credits towards their state pension or other benefits, even if they are working multiple such jobs and paying income tax on the total.

    The existing NI system doesn't cater at all well for the 'gig' economy, but there appears to be little appetite from anyone to address it;s shortcomings, which would probably involve a complete redesign (or scrapping it completely and just raising the rate of income tax - which has consequences for state pension eligibility and pushes responsibility more under the control of the devolved governments)  
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