Changes to NICs Regulations

The Social Security (Contributions) Regulations 2001 have been extensively amended to reflect the rewriting of the tax legislation relating to employment income and the rewriting of the PAYE Regulations. They include measures to match the provisions in the tax legislation for mandatory electronic filing of year end returns and mandatory payments to the Accounts Office. Although most of the changes are simply to bring the terminology into line and correct the cross references to the corresponding tax legislation, there are a number of specific changes.

Repayment of overpaid NICs
Two new regulations (52 and 52A) have been added to the 2001 Regulations to define the rules that apply to

• the repayment to an employer of a payment of NICs made in error to the Account Office, and
• the repayment to an employee of primary contributions that have exceeded the maximum amount due for the tax year.

In both cases, the request must be in writing, be made normally within 6 years, and the amount involved must exceed a 'de minimis' value.

Recovery of uncollected NICs
Regulation 86 of the 2001 Regulations is amended to allow the recovery by the Inland Revenue of primary Class 1 NICs from an employee where the Inland Revenue is satisfied that the employee knows of the employer's wilful failure to pay the contributions to the Accounts Office and collect them from the employee. This mirrors existing provisions for the recovery of income tax.

Recovery of under-deducted NICs
Where an employer under-deducts primary Class 1 NICs from an employee's earnings, the under-deducted amount may be recovered by making deductions from the employee's earnings in future earnings periods

• up to the maximum of Class 1 NICs that are due on the earnings in each period, and
• not beyond the end of the current tax year.

Part II of Schedule 4 of the 2001 Regulations is amended to extend the recovery period by a further year. The new provision comes into effect from 6 April 2004 and allows the employer to recover under-deducted Class 1 NICs during the remainder of the current tax year and in the next tax year, but only in the following two new situations:

• where the under-deduction was due to "an error made by the employer in good faith", and
• where a payment is made to an employee working outside of the UK and whose earnings are subject to Class 1 NICs but not to income tax.

The restriction on how much may be recovered in each earnings period has not changed.

Note that this unexpected and unannounced change in the Regulations means that the instructions on page 17 of the 2004/05 issue of the CWG2 Further Guide will be incorrect throughout the coming tax year.

Example: An employer deducts Class 1 NICs from an employee's earnings on the understanding that the employee is in contracted-out employment. In February, with only one month to go before the end of the tax year, it is discovered that the employee was not contracted-out at all during the tax year. The amount of NICs under-deducted as a result is £;230.

Under current rules, the amount that can be recovered is limited to an amount that is equal to the amount of NICs that are due on the employee's earnings in the final month of the tax year. The amount of primary NICs due for March is £;90. The employer may recover a further £;90 towards the £;230 under-deduction, but must bear the loss of the remainder.

Under the new rules, assuming that the under-deduction was due to "an error made by the employer in good faith", the employer can recover the remaining £;140 from the employee's earnings in April and May.

This change supplements the concession to these rules that was made a year ago in the case of payments made by a third party to an employee for which the employer is treated as being the secondary contributor, e.g. a payment made by an intermediary such as an Employee Benefits Trust. In that situation, because the employer has to recover the full amount of primary NICs on the payment, the recovery period also extends to the following tax year but, in addition, there is no limit on the amount that may be recovered in any earnings period.
(Sources: www.inlandrevenue.gov.uk/si/2004-0770.pdf
www.inlandrevenue.gov.uk/si/information.pdf )
...back to 19 March 2004

Payments by third parties connected to the employer

Under the provisions of the Social Security (Contributions) Regulations 2001 (Schedule 4, Part I, paragraph 4A, where payments are made to an employee by an intermediary of the employer, the employer is treated as the employer and therefore liable for the Class 1 NICs on those payments. These rules cover, for example, payments made by an Employee Benefits Trust or by another company that is in the same group as the employer.

The Chancellor announced in the Pre-Budget report that the law would be clarified in order to close a loophole that allows payments to employees by such connected third parties to be treated as the payment of tips or gratuities.

Tips and gratuities are not liable for Class 1 NICs if one of two conditions is satisfied:

• the payment is not made, directly or indirectly, by the employer and do not comprise or represent sums previously paid to the employer, or
• the employer does not allocate the payment, directly or indirectly, to the employee.

The changes introduced by the Social Security (Contributions) Amendment Regulations 2004 do not change the rules that apply to the exemption from Class 1 NICs where tips and gratuities are distributed by a troncmaster. Rather, they are worded so as to prevent payments by intermediaries of the employer being treated as tips or gratuities.

The new Regulations, which take effect from 23 February 2004, now exclude from the exemption any payment

1. that is made by a connected third party unless
   
   
   • it is made in recognition for personal services rendered to the third party by the employee or by another employee of the employer, and is similar in value to a payment that might reasonably be expected to be made by an unconnected person, or
   • the person making the payment does so in his capacity as a troncmaster, or
     
     

2. that is made by a trustee who is not a troncmaster and who holds property for any persons, or class or persons, that include the employee.

(Source: www.inlandrevenue.gov.uk/news/ss-regs-2004.pdf )
...back to 6 February 2004

Deficiency Notices

The Inland Revenue will be issuing some 10 million deficiency notices to employees during the autumn. The notices will advise employees that they do not appear to have paid enough NICs for one or more of the years 1996/97 to 2001/02 to count towards their retirement pension. The notice will be accompanied by an explanatory leaflet that explains the options of making good the shortfall or disagreeing with the Inland Revenue's records.

If an employee queries any aspect of the deficiency notice with the employer, the Revenue's advice for employers is that they should not get too involved but just give the employee any factual information about their earnings and contributions paid in the relevant year(s). They should not offer advice about pension entitlement but refer them to the further information provided in the leaflet.
(Source: www.inlandrevenue.gov.uk/employers/empbull15.pdf )
...back to 26 September 2003

Mariners' NICs

As provided by the Social Security (Categorisation of Earnings) Regulations 1978, where employees are employed by a foreign employer, and the employee's services are made available to a person with a place of business in the UK (the "host employer"), the host employer is the secondary contributor for the employee.

In the case of mariners, new Regulations take effect from 13 October 2003 that limit the application of the "host employer" rules to circumstances where their employment duties are performed wholly or mainly in category A, B, C or D waters.

The four categories of waters, as defined in Merchant Shipping Notice M1776(M) are:

• Category A: Narrow Rivers and canals where the depth of water is generally less than 1.5 metres.
• Category B: Wider rivers and canals where the depth of water is generally 1.5 metres or more and where the significant wave height could not be expected to exceed 0.6 metres at any time.
• Category C: Tidal rivers and estuaries and large, deep lakes and lochs where the significant wave height could not be expected to exceed 1.2 metres at any time.
• Category D: Tidal rivers and estuaries where the significant wave height could not be expected to exceed 2.0 metres at any time.

The new Regulations have been introduced to stop the practice of some inshore shipping operators of avoiding employers' NICs by using workers employed through offshore companies. The exemption from the "host employer" rules will, in future, apply only to mariners who are engaged wholly or mainly outside of the defined category waters.
(Source: www.inlandrevenue.gov.uk/mariners/index.htm )
...back to 19 September 2003

Employment Retention Scheme and Return to Work Credits

The Department for Work and Pensions (DWP) announced, in June 2003, that a new pilot scheme, the Employment Retention and Advancement Scheme, is to be introduced in six areas to help people retain their jobs and progress in them. The scheme will run for 33 months and will evaluate the effectiveness of the in-work training and assistance provided to employees who have found work under the New Deal. The scheme offers financial incentives to employees, including retention and training bonuses.

A further pilot scheme, the Return to Work Credit, is designed to provide a financial incentive to return to work following a period on Incapacity Benefit. It will offer £;40 per week to employees with earnings below £;15,000.

Payments to employees under these two schemes will be free from PAYE income tax and Class 1 NICs. The Regulations implementing these provisions have been made and come into effect from 1 October 2003.
(Sources: www.dwp.gov.uk/publications/dwp/2003/pathways2work.pdf
www.dwp.gov.uk/publications/dwp/touchbase/2003/tb32.pdf
www.inlandrevenue.gov.uk/si/2003-2340.pdf
www.inlandrevenue.gov.uk/si/2003-2339.pdf )
...back to 12 September 2003

Reimbursement of bank charges

The Inland Revenue has confirmed that payment of an employee's bank charges, where the payment is prompted by the failure of the employer to pay wages or salary at the recognised time, is not subject to PAYE tax or Class 1 NICs.

The payments do not derive from the employment but are intended to compensate the employer for breach of contract. The employee accepts the payment in return for giving up the right to sue the employer for compensation.

Where employers have deducted tax and NICs through the payroll, they may refund the deductions and are encouraged to discuss the arrangements with their tax office.
(Source: www.inlandrevenue.gov.uk/bulletins/tb65.pdf)
...back to 27 June 2003

Changes to NICs regulations

Two changes that affect the procedures for handling Class 1 NICs have been made by The Social Security (Contributions)(Amendment No. 4) Regulations 2003. They come into force on 10 June 2003.

Recovery of NICs

It was announced at the time of the April Budget that a change would be made to the rules governing the recovery of NICs. The established rules have been changed where the deduction relates to share-based earnings.

Under the existing general rules, where an employer has deducted insufficient Class 1 NICs in one or more earnings periods for any reason, the under-deduction may only be recovered in later earnings periods within the same tax year. Also, the amount that may be recovered in any earnings period may not exceed the amount of primary contributions that are due on the employee's earnings in that period.

Examples of situations where those rules continue to apply are where an employer has deducted insufficient Class 1 NICs in an earnings period as the result of an error, or because deductions have been taken at the contracted-out rate and the relevant certificate has been cancelled.

However, the restriction on how much may be deducted in each earnings period has been removed, and deductions may be made in the current and next tax years, in the following situations:

• where earnings are paid by an intermediary of the employer, e.g. an Employee Benefit Trust, and, as a result, the employer is the secondary contributor,
• where the payment comprises a beneficial interest in shares, or
• where a tax liability arises on share-related income under the various share schemes operated by employers.

Other than in these specific situations, the established restrictions on deducting NICs continue in force.

P60 certificate of tax deducted

Existing regulations require that an employee be given a P60 certificate if no tax has been deducted during the year but the employee has paid primary Class 1 NICs. This provision has been amended to ensure that an employee who has paid no tax or primary NICs during the year is still given a P60 certificate where primary Class 1 NICs are treated as having been paid because the employee's earnings exceed the lower earnings limit but not the earnings threshold.
(Source: www.inlandrevenue.gov.uk/si/2003-1337.pdf)
...back to 23 May 2003

NICs for mariners working in UK territorial waters

Under provisions that have applied since 1994, UK employers that use workers supplied by a staff supply agency abroad are required to operate NICs for those workers, even though the are not employees. The Social Security (Categorisation of Earners) Regulations 1978 states that it is the "host employer" who has the secondary NICs liability in the case of employment by a foreign employer where

• the personal services of the person employed are made available to the host employer, and
• the personal services are rendered for the purposes of the host employer's business, and
• the personal services for the host employer began on or after 6 April 1994.

However, Revenue guidance has been that these rules do not apply to UK employers using mariners, supplied by offshore manning companies, to work in UK territorial waters. Neither the UK employer nor the offshore manning company has paid employer's NICs. As a result, it has become the practice of some operators in the UK shipping industry to use offshore manning companies to provide the services of UK-resident mariners, thereby allowing the UK employer to avoid having to pay any secondary NICs for those mariners. In some cases, operators have transferred the employment contracts of their employees to companies outside of the UK in order to take advantage of this loophole.

The Government has now announced that it has reconsidered the advice that the "host regulations" do not apply to the employment of mariners. As there is nothing in the Regulations that specifically excludes the employment of mariners from the hosting rules, the Revenue's direction now is that UK employers that use offshore manning companies will be liable for secondary Class 1 NICs for mariners who work in UK territorial waters from 6 October 2003. There will be no retrospective liabilities for employment prior to that date as the employers have only been following Revenue guidance.

This change of guidance does not apply in the case of mariners employed wholly or mainly outside of UK territorial waters. The "host regulations" will be changed to make this clear.
(Source: Inland Revenue press release)
...back to 25 April 2003

Entertainers as employed earners

Under the provisions of the Social Security (Categorisation of Earners) Regulations 1978, individuals who work as entertainers, defined as a "person who is employed as an actor, singer or musician, or in any similar performing capacity", are treated as employed earners and therefore subject to Class 1 NICs, even though, because they are not employed under a contract or service or as an office holder, their earnings are not subject to PAYE income tax.

However, under new Regulations that take effect from 6 April 2003, they are excluded from liability for Class 1 NICs if their remuneration does not include any payment by way of salary. In this context, "salary" is defined as payment

• for services rendered,
• paid under a contract for services,
• payable at a specific period or interval (if there is more than one payment), and
• computed by reference to the amount of time for which work has been performed.

Consequently, payments made to an entertainer who is not an employee or office holder are not subject to Class 1 NICs as long as they are not, or do not include, "salary" payments as defined above.

The Regulations also specify that the secondary contributor for such "salary" payments is the producer of the entertainment.
(Sources: The Social Security (Categorisation of Earners) Amendment Regulations 2003 - www.inlandrevenue.gov.uk/si/2003-0736.pdf , and The Social Security (Categorisation of Earners) Amendment (Northern Ireland) Regulations 2003 - www.inlandrevenue.gov.uk/si/2003-0736.pdf )
...back to 21 March 2003

New NICs rates and table letters

The Revenue has published new test data to help payroll system developers prepare for the increase in the NICs rates from April 2002, the additional contributions for employees on earnings above the upper earnings limits, and the introduction of new table letters for employees with deferment certificates. The tests include the interaction between NICs and SAP/SPP payments and the situation where employers may have to report negative NICs at the end of the 2003/04 year-end.

To illustrate the negative NICs phenomenon, using table letter D and calculating NICs using the exact method, if an employee earns £;386 per month throughout 2003/04 (i.e. £;1 more than the earnings threshold), the net primary and secondary contributions for the year will -£;29.04, and the figure will appear on the employee's P14 as £;29.44, with a letter 'R' alongside to indicate that the amount in negative.

The tests also demonstrate clearly the considerable increase in NICs that employers will be paying from April 2003 as a result of freezing the earnings threshold and increasing all of the rates by 1%. For example, using table letter A and the exact method of NICs calculation:

• An employee earning £;729.99 in a month pays £;34.50 primary NICs now and, on the same earnings, will pay £;37.95 from April 2003, a 10% increase. The equivalent increase for employers is from £;40.71 to £;44.16, an 8.5% increase.
• The primary NICs for another employee, whose monthly earnings increase from £;2,600 now to £;2,700 from April, increases from £;215.00 to £;242.55, an increase of 12.8%. The employer's NICs increase from £;261.37 to £;296.32, a 13.4% increase.

The new test data is available at www.inlandrevenue.gov.uk/ebu/testdata/additional_v1_3_28_10_02.pdf .
Payroll Briefing 11 - 28 November 2002

NI table letters and deferment

Important changes to NI table letters have been announced in the latest issue of NI Guidance for Software Developers. The introduction of the additional 1% contribution by employees on their earnings above the earnings threshold (ET) from April 2003 will create a number of interesting situations for employers, especially for those with contracted-out pension schemes.

The changes are prompted particularly by the requirement for employees with CA2700 deferment certificates to pay Class 1 NICs in each of their employments. At present, employees who pay full Class 1 NICs (i.e. at or above the upper earnings limit (UEL)) may apply to be exempt from paying primary contributions in any other employment. They are issued with a CA2700 deferment certificate and, when in possession of the certificate, the employer allocates table letter C (not-contracted out), C (contracted-out) or S, depending on the employee's pension situation, and pays only secondary contributions on the employee's earnings.

This procedure changes from 6 April 2003. As well as paying full NICs in one employment, the employee will also have to pay primary contributions on earnings in the other employment(s) for which a CA2700 certificate is held. It is this new requirement that necessitates changes to NI table letters.

The new table letters and rates in deferred employment will be as follows:

- In not contracted-out employment, the table letter will change from C to J and the employee's contributions will be

• 0% of earnings between the lower earnings limit (LEL) and the ET,
• 1% of earnings between the ET and the UEL, and
• 1% of earnings above the UEL.

- In contracted-out salary-related (COSR) employment, the table letter will change from C to L. In contracted-out money purchase (COMP) employment, the table letter will continue to be S. In both of these arrangements, the employee's contributions will be

• 0% of earnings between the LEL and the ET,
• 2.6% of earnings between the ET and the UEL, and
• 1% of earnings above the UEL.

However, employees in COSR or COMP employment will be entitled to the 1.6% contracted-out rebate on their earnings between the LEL and the UEL. The result is, therefore, that the employee's actual contributions will be

• a rebate of 1.6% of earnings between the LEL and the ET,
• 1% of earnings between the ET and the UEL, and
• 1% of earnings above the UEL.

This convoluted arrangement creates a situation that is similar to the way that contracted-out rebates already operate for lower-paid employees. Where an employee's earnings are between the LEL and about £;108 per week, the amount of the 1.6% rebate will exceed the employee's contributions. In this situation, the employee's NICs will be reduced to nil and the employer will keep the difference. The rebate may not be offset against the NICs due on earnings above the UEL.

Readers may have noticed that the new table letters also have the effect of removing the anomaly of having two table letters C. The existence of two identical table letters with different meanings has always caused considerable confusion and the Revenue is taking this opportunity to correct the situation. Table letter C will remain but will only be used for pensioners and any other situation where there are no employee contributions at all.

In summary, the table letters from April 2003 will be:

Increases in NICs

The Budget Report in issue 223 of Payroll Briefing, on page 4, showed that the freezing of the earnings threshold and the 1% increase in NICs rates will increase both employee and employer NICs by around 15%. Now that the lower and upper earnings levels for 2003/04 have been confirmed (see above), some clearer costings are possible. The following Table gives the overall percentage increase in NICs where employees have a year-on-year rise in earnings of 3% and 4% respectively.

£;100

£;100

£;400

£;400

£;585

£;585

£;100

£;100

£;400

£;400

£;585

£;585

The overall effect of the planned changes to NICs rates and thresholds for 2003/04 is that:

• the lowest paid employees have the largest increases in percentage terms
• as earnings increase towards the UEL, the rate of the NICs increase falls to around 13%
• above the UEL, the employer's increase continues to reduce marginally, whereas
• the percentage increase for employees rises further beyond the UEL, reflecting their new 1% contribution on earnings above the UEL

It is also interesting to note that the employers that will see the largest increases in their NICs bill are those that provide contracted-out final salary pension schemes.

There are two further news items about the new NICs rates from 2003/04:

• The Revenue has estimated that the only administrative cost arising from the new NICs rules will be an additional two minutes where an employer calculates payroll manually and has to look up the extra 1% of earnings from the NICs Tables for employees who have earnings above the UEL. Employers using a computerised payroll should not have to spend any extra time applying the new rules.
• The National Insurance Contributions Bill reveals that, although the Treasury has the statutory powers to increase the rates of employer and employee NICs each year by up to 0.25% without the direct approval of Parliament, such powers will not extend to the 1% that employees will pay on earnings above the UEL. Any increase in the 1% would require a further Budget announcement and the inclusion of the measure in that year's Finance Bill.

Payroll Briefing 224 - 23 May 2002

Secondary NICs due for employees seconded abroad

Some employers with employees seconded abroad have difficulty in obtaining, from the overseas company, the final details of NICs due in respect of the employment in time to meet the 19 May deadline for submitting the P35 Employer's Annual Return. A new concession is to be introduced from April 2002 that will, in defined circumstances, allow another P35 to be submitted, by 31 January following the end of the tax year, that shows the residual secondary NICs.

The conditions for this concession are:

• The employee is not liable for UK tax and has been given an NT code.
• The Class 1 NICs entered on the employee's P14 are equivalent to the maximum primary contributions for the year. In other words,
there are no more NICs to report for the employee, only for the employer.
• The only payments covered by the scheme are those that the employer cannot find out about in time to include on the main P35
return. Payments that may not be included are (1) any earnings paid in the UK, (2) known regular earnings paid overseas, or (3)
estimates of overseas earnings.
• The scheme may not be used to correct errors or omissions in the main return.

To use this scheme, the employer must apply to the tax office by 30th November of the year in question (earliest 30 November 2002). An additional reference number will be provided to use when submitting the P35 and making the final payment.
Payroll Briefing 210 - 11 October 2001

NICs on statutory mileage rates

The Revenue's authorised mileage rates (AMRs) for the use of private cars on company business will be replaced by new statutory rates from April 2002, i.e. 40p per mile for the first 10,000 miles in a tax year, and 25p per mile thereafter. See Payroll Briefing issue 197, The Budget for Payrollers. As long as employers' payments do not exceed these rates, they will not give rise to a liability to tax or Class 1 NICs. However, at the time this new tax relief structure was announced, the Revenue had not decided how NICs liabilities would be handled if the 10,000-mile threshold were exceeded during a tax year.

At present, under the AMR rules, the lower mileage rate applies after the first 4,000 business miles in a tax year. However, the mileage threshold does not apply for NICs purposes and, even after 4,000 miles, no NICs liability arises where the employer's mileage rate exceeds the lower rate but not the higher rate. This can create a situation where there is a profit for tax purposes but no corresponding NICs liability. However, the concession recognises the difficulties that employers may experience in identifying the precise point in a tax year when a profit arises from mileage payments and the requirement arises for Class 1 NICs to be deducted in that earnings period. In contrast, employers are only required to identify the amount of any profit from mileage payments for tax purposes at the end of the year when preparing form P11D.

Consider, for example, an employer who pays 40p per mile, irrespective of annual business mileage, for a 1.8 litre car. The current AMRs are 45p for the first 4,000 miles, and 25p per mile thereafter. The employee only starts to make a profit when 5333.33 business miles have been paid, (i.e. 5333.33 × 40p = (4000 × 45p) + (1333.33 × 25p)). If the current NICs concession did not apply, the employer would have to start calculating Class 1 NICs in the earnings period in which payment was first made for mileage that exceeded 5333.33 miles.

The Revenue has now published a Consultation Paper setting out proposals for NICs liabilities on mileage payments for the new statutory mileage rates. The Paper states that it is the Government's intention to treat mileage payments, as far as possible, in the same way for both income tax and NICs. The proposal is, therefore, for the 10,000-mile threshold to apply equally to NICs liabilities. The effect of this, as explained in the Paper, is, "employers will need to keep sufficient records of the mileage payments made to their employees to enable them to identify when the lower mileage rate needs to be applied to the NICs calculation".

This quote from the Consultation Paper does more than show that this requirement, if it comes into effect, will impose a regulatory burden on some employers. The reference to "when the lower mileage rate needs to be applied" points to a significant difference between the ways in which the income tax and NICs liabilities will be calculated for the statutory mileage rates.

Calculation for Income Tax

The liability for income tax considers the total amount of mileage payments made in a full tax year. Section 197AD(3) of the Income and Corporation Taxes Act 1988 (ICTA) states:

"Mileage allowance payments are approved only if, or to the extent that, for a tax year, the total amount of all the mileage allowance payments made to the employee for the kind of vehicle in question does not exceed the approved amount for mileage allowance payments applicable to that kind of vehicle."

The calculation of the "approved amount", i.e. the total mileage payments for the year that do not incur a tax liability, is defined in Schedule 12AA(4)(1) of ICTA:

"The approved amount for mileage allowance payments that is applicable to a kind of vehicle is M × R, where M is the number of miles of business travel by the employee (other than as a passenger), using that kind of vehicle, in the tax year in question; and R is the rate applicable for that kind of vehicle."

The "rate applicable" for a car (from April 2002) is 40p per mile for the first 10,000 miles and 25p per mile after that.

Calculation for Class 1 NICs

The definition of how the liability for NICs is calculated, as set out in the draft Regulations attached to the Consultation Paper, differs from the tax calculation in that the liabilities are not determined on an annual basis. They cannot be because Class 1 NICs liabilities have to be determined within each earnings period throughout a tax year. Therefore, the draft Regulations state that "payments to be disregarded in the calculation of earnings" will include:

"So much of a mileage allowance payment as does not exceed N × R. Here, N is the number of miles of business travel in respect of which the payment is made and R is the rate applicable for the time being in respect of the business travel and the qualifying vehicle in question in accordance with paragraph 4(2) of Schedule 12AA to the Taxes Act (ICTA)."

Note that this paragraph refers to "a mileage allowance payment", not to the total of all payments for the tax year. In practice, of course, the potential for Class 1 NICs liability must be considered for each payment made during the year. Any payment where the mileage rate exceeds the higher "rate applicable", i.e. 40p per mile from April 2002, would create a Class 1 NICs liability on the excess at the time of the payment.

Consequently, in the earnings period where the mileage payments for an employee first exceed the 10,000-mile threshold in a tax year, the lower "rate applicable" comes into effect. If the mileage rate paid in that and subsequent earnings periods exceeds the lower statutory rate, i.e. 25p per mile from April 2002, Class 1 NICs will be due on the excess.

Implications

The first implication of these proposals is that employers who make mileage payments to employees who do more than 10,000 business miles in their own vehicles in a tax year will have to keep a running total of the business miles for which payment have been made, and start to calculate Class 1 NICs, if necessary, in the correct earnings period.

However, there is a further and more significant problem, caused by the requirement to determine the NICs liability when the 10,000-mile threshold is first exceeded rather than when the employee first makes an overall profit from the mileage payments. These proposals can create a situation where the employee has no income tax liability, because the total mileage payments for the year do not exceed the "approved amount" for the year, but has a liability for Class 1 NICs.

For example, an employee travels 12,000 miles on business in a year and is paid 35p per mile for all of those miles, £;4,200 in total. The "approved amount" for the tax year is £;4,500, (i.e. (10,000 × 40p) + (2,000 × 25p)). As a result, there is no tax liability and no entry will need to made on form P11D at the year end.

However, the NICs liability first arises when the 10,000-mile threshold is reached and the employer will have to calculate Class 1 NICs in the last two or three earnings periods of the tax year. As the 2,000 miles that exceed the threshold are paid at 35p, i.e. 10p per mile more than the "applicable rate", Class 1 NICs will be due on £;200, spread over the relevant earnings periods.

Employers whose mileage payments will match the statutory rates from April 2002, or who will use rates that are lower each side of the threshold (e.g. 35p for the first 10,000 miles and 20p per mile thereafter) will not have a problem with these new rules. However, those with employees who travel more than 10,000 business miles in their cars each year and who are paid a single rate greater than 25p per mile irrespective of mileage will experience these problems with NICs. Similarly, employers who intend to continue with multiple rates related to engine size should also consider carefully the implications of doing so.

Responding to the proposals

The consultation period for the proposed NICs Regulations runs until the end of October. Readers who wish to respond to the proposals should download a copy of the Paper and draft Regulations from the Revenue's website, at www.inlandrevenue.gov.uk/consult_new/index.htm.

The Revenue has not indicated how many employees it is estimated travel more than 10,000 business miles in their private cars each year. It must be a tiny minority of all such employees. It would seem, therefore, to make more sense for the Revenue to continue to operate without a threshold for NICs purposes, just as now, and have a single "applicable rate" of 40p for NICs, irrespective of business mileage in the tax year. - Payroll Briefing 208 - 13 September 2001

National Insurance contributions concession

Many credit card companies, banks and retailers pay a reward to employees who recover lost or stolen credit, debit and charge cards, cheque guarantee cards and cheque books. Such rewards are subject to income tax under PAYE where the documents are recovered in the course of the employees' work. (IR Schedule E Manual, paragraph SE1070) In some cases, the issuer of the document may make an additional payment in order to cover the employee's tax liability.

A new concession included in The Social Security (Contributions) (Amendment No. 5) Regulations 2001 excludes such rewards, and payments in respect of the tax liability, from any liability to Class 1 NICs. However, the concession does not apply to employees of the issuer of the document. For example, a reward paid to a shop assistant for recovering a Barclaycard credit card would not be liable to NICs, but the same reward paid to an employee of Barclaycard would be subject to NICs. - Payroll Briefing 206 - 19 July 2001