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28/07/2010 17:19
 
ccc manager
9th Level Poster

Joined: 24/10/2008
Posts: 10

Hope you can help!

We have a director who is an employee, so we have ignored the fact that he is a director for this tax year so far.

My problem is that he received a bonus this month (this will be the only month he receives extra) and last year when we used HMRC's software, it resulted in him having an underpayment when it came to month 12, so am trying to make sure we don't have the same problem this year. I have just calculated month 5 to see what the figures are, and ignoring him as a director just goes back to what he was paying in months 1-3, and flagging him up as a director means he is paying even less from month 5 onwards! Having worked out what his total gross pay will be for the year, I used HMRC's "Director's Annual Earnings Period Check" and based on what he is paying, it will leave him with an underpayment at the end of the year of £280.27! Am I missing something? Can I do the check that HMRC software does to work out NIC on a cumulative basis, as I can't see how to do this? I tried checking the APP box but this did not seem to have any effect when recalculating.

For 11 months this director/employee earns £2539 and for one month only he earns £6462 = £34391. According to HMRC, he should be paying £3153.36 NIC for the year.

Hope this makes at least a little sense

 
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28/07/2010 18:04
 
12Pay Support
2nd Level Poster

Joined: 13/02/2007
Posts: 1219

Firstly, the APP box is solely for directors who change pension scheme during the year. In above 99.9% of cases it would be completely irrelevant.

There are only 2 ways you can calculate directors NI.

  1. You can either leave the "Ignore" box blank, in which case NI will be calculated on the employee's cumulative pay for the year, compared with cumulative limits. So until the employee has earned up to the annual Earnings Threshold they'll pay no NI at all, then they'll pay on all their earnings at the normal rate util they've earned up to the annual Upper Earnings Limit.
  2. You can tick the "Ignore" box, in which case NI will be calculated as if they were a normal employee every month until the last month of the year. But in the last month NI will be calculated by comparing their total earnings with the annual limits (as in case #1). If they earned above the upper earnings limit in any month in the year they'll become liable to additional NI in the last month, and this is the situation which you've caught, but there isn't really a lot you can do about it, except for put the money aside so that you can pay it when it comes due later.

Those are the only 2 choices. You can either pay more NI in month 12 for the bonus that was baid in month 5, or you can operate directors NI through the year, and have a very odd payment profile where you pay nothing to begin with, and then lots. The total paid in the year will be the same either way.

We don't make the rules. Our software just enforces them.

12Pay Support
 
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29/07/2010 11:56
 
ccc manager
9th Level Poster

Joined: 24/10/2008
Posts: 10

Many thanks for such a quick reply, as always!

I mistakenly thought the APP box was the Director's Annual Earnings Period calculator - is there no way of running this calculation throughout the year, rather than just at the year end, or am I right in thinking that whatever choice I make now, there is always going to be an underpayment come month 12?

Basically, the Director I mention was very unhappy last year being saddled with an extra few hundred £s in NIC to pay in month 12 and thought it was our mistake, so am trying to avoid the same thing happening again. Would you say my only option to avoid this is to make him overpay by £35 each month on account of the £280 underpayment that would otherwise be due in month 12?

I can appreciate you don't make the rules and I was not questioning the validity of your software, which is excellent

 
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29/07/2010 12:14
 
12Pay Support
2nd Level Poster

Joined: 13/02/2007
Posts: 1219

You run the directors annual earnings calculation through the year by unticking the "Ignore" box. But that then leads to the situation where nothing is paid for the first few months, and then a higher amount per month is paid for the remainder of the year.

The extra NI in month 12 last year was not a mistake, it was correct payroll operation as per HMRC instructions in document CA44. When you tick the "Ignore" button you are operating under the "Alternative Arrangements" described on page 4 of that book. He should be delighted that his NI was deferred for 6 months, in his pocket rather than HMRC's. Basically, in any month where he earns above the monthly Upper Earnings Limit, which is currently about £4600/month, he should be aware that he'll be charged employee's NI on the excess at year end. This is a requirement laid down by HMRC, not an option.

Thanks for your kind comments, we didn't intend to sound defensive in our previous response.

12Pay Support
 
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