National Insurance calculation - help needed!

maxi_isa

Does anyone understand the NI contribution system? If so, I need your help.

My wife retires next year. She has received a letter from the NI Office saying she has underpaid her NI in a previous year (equivalent to 18 weeks) and must pay £132 for the year (2005-06) to qualify for her pension.
She only works part time and her pay for the year in question was £4532 on which £87.15 NI was deducted.
In 2005-06 the primary threshold was £94 or £4888 pa ie more than she earned. Does that mean she shouldn't have paid anything?

We have contacted the NI Ofice 3 times and requested a copy of their calculation but they just keep sending out a standard reply with no details. This is very frustrating.

I'd be very grateful if anyone can offer some clarification.

chrisbur

maxi_isa wrote: »

Does anyone understand the NI contribution system? If so, I need your help.

My wife retires next year. She has received a letter from the NI Office saying she has underpaid her NI in a previous year (equivalent to 18 weeks) and must pay £132 for the year (2005-06) to qualify for her pension.
She only works part time and her pay for the year in question was £4532 on which £87.15 NI was deducted.
In 2005-06 the primary threshold was £94 or £4888 pa ie more than she earned. Does that mean she shouldn't have paid anything?

We have contacted the NI Ofice 3 times and requested a copy of their calculation but they just keep sending out a standard reply with no details. This is very frustrating.

I'd be very grateful if anyone can offer some clarification.

I would recomend getting a pension forcast from
http://www.thepensionservice.gov.uk/atoz/atozdetailed/rpforecast.asp

You should then have a better idea if it is worth paying to have this year count.

As far as NI is concerned the deduction is decided on your pay each week or month if you are paid monthly. For 05/06 the lower earnings limit was £82 for weekly paid employees anyone earning at least this a week was counted as paying that week. The earnings threshold was £94 so actual payment of NI only occured if earnings were above this. So your wife must have had 18 weeks when her earnings were below £82. If you have a P60 for this year or payslips you can check this.

maxi_isa

Thanks chrisbur.

My wife has had a pension forecast and does need the year in question to count. She is paid monthly and in some of those her pay would have been below the LEL and ET (weekly equivalent). But 18 weeks is not a whole number on months. So if a person doesn't earn enough to trigger a NI payment, do they receive no credit and have to find the cash to buy contributions anyway?

The numbers do not seem logical. For example, in 2006-07 (which was not a problem) my wife paid £107 NI on earnings of £5,204. Big question ... why should she have to pay more ie. approx £200 on the lower earnings of £4,432 in 2006-06? It doesn't look right.

Any thoughts on why this could be the case?

CLAPTON

maybe her earnings aren't the same each month.
NI is worked out on a monthly basis and not a cumulative basis like tax. So some months she may hae paid nothing and others she may have paid some, so you would need to look at each payslip to see the precise position.

maxi_isa

Thanks CLAPTON.

You are correct that there were some months (six, in fact) when she didn't earn enough to trigger an NI deduction. But how would the shortfall then be calculated?

And it seems crazy that her NI charges should be higher than in a year when she earned quite a lot more.

If the monthly charging basis produces these distortions, it's an odd result for it to happen to a fiarly low-paid part-time worker.

We will keep trying to get the NI Office to explain it. Ordinary income tax calculations are pretty straightforward. It's a pity that NI isn't unless you earn the same amount every month and it's above the primary threshold.

CLAPTON

basically, it is fairly simply, its just that you work it out each separate month

most people find the cumulative tax methd impossible to understand

Murdina

Have you looked through
http://www.hmrc.gov.uk/nic/class3-faq.htm
at all?

I think maybe what is confusing you is that the shortfall is paid for at the standard rate set for class 3. It bears no relation to what the person with the shortfall actually earned in the weeks when the shortfall arose (typically of course, they earned nothing).

I take it you have also considered whether or not your wife has years covered by home responsibilities protection, if she had children under 16 at any time?

http://www.hmrc.gov.uk/childbenefit/hrp.htm

Hope that makes it clearer?

chrisbur

maxi_isa wrote: »

Thanks chrisbur.

My wife has had a pension forecast and does need the year in question to count. She is paid monthly and in some of those her pay would have been below the LEL and ET (weekly equivalent). But 18 weeks is not a whole number on months. So if a person doesn't earn enough to trigger a NI payment, do they receive no credit and have to find the cash to buy contributions anyway?

The numbers do not seem logical. For example, in 2006-07 (which was not a problem) my wife paid £107 NI on earnings of £5,204. Big question ... why should she have to pay more ie. approx £200 on the lower earnings of £4,432 in 2006-06? It doesn't look right.

Any thoughts on why this could be the case?

I assume that there is a bit of rounding when charging for missing months; as far as I know there are no monthly rates for Class 3 contributions so must get converted to a weekly rate.
The LEL and ET did not change a lot from 05/06 to 06/07 and as you say your wife earned more in 06/07 there must have been fewer months or possibly no months when her earnings were below the LEL that year.
The lower a person's earnings are, the more likely that they will not reach the LEL, and so the more likely that at the end of the year, they will not have paid enough to qualify for benefits for that year.

maxi_isa

Many thanks to all for your comments which point towards the fine detail of the system for producing this apparent distortion. I will continue to request the NI Office to produce their "calculation/methodology".

It's a pity that such a basic tax system is so clumsily presented (and I have looked at lots of the official info.)

Again, thanks for your help.

mrkbrrws

You could try to check this if you have a P60 for the year.

There should be a figure for "Earnings at the LEL (where earnings are equal to or exceed the LEL)".

A full year of contributions would be shown as approx. £4,264 (£82 per week). If your wife had 18 weeks that did not qualify, you would expect the figure to be about £2,788.