Variable Earnings & Class 1 NIC Liability

[MIKEL2]

I have a question which is bugging me and cannot find an answer anywhere.

Assumption; Employee only earns for say 7 months of the Tax year.

1. Employee earns variable amounts from month to month. Some earnings are above the ET (Earnings Threshold)and some below.

2. Calculations are made on a 'month by month basis' as normal, dependant upon the gross monthly earnings.

Now, when calculating the class 1 liablity on the total annual earnings basis using one of the many internet based calculators I get a different total employee NIC liability as compared to the summation of the individual monthly liabilities. This I believe is because NIC class 1 is liable and due when earnings/salary are paid and is not calculated in the same manner as directors etc.

So, am I correct in assuming that one will pay more in employee NIC if one only works for part of a tax year? Or should both methods of calculation of liability be the same at year end?

[MIKEL2]

Just to clarify 'as compared to the summation of the individual monthly liabilities'

means when using NIC tables.

[Instinctive]

Tax works on a cumulative basis and is therefore effectively averaged out over a year.

NI, on the other hand, works on stand alone basis and not cumulated or averaged over the year. It is calculated be reference to the weekly, monthly or yearly lower and upper earnings limits, depending on whether the employee is paid weekly, monthly or yearly.

as a result of this, Directors who owned their own companies, devised a scheme where they were paid below the lower earnings limit for 51 weeks of the year and therefore paid no NIC for 51 weeks. They then paid themselves a massive salary in week 52 but paid NIC in week 52 by reference to the upper limit for one week only. To counteract this, the law was amended some years ago so that the Directors pay NI on their salary on an annual cumulative basis, ie they will pay NIC by reference to their annual salary by using the annual limits.

I hope this answers your query?

Ramnik
ramnikrp@hotmail.com

[MIKEL2]

Ramnik, many thanks for your reply.

So I can take it that one will pay more in the specific months etc and therefore overall when compared to calculations based on an average monthly salary. This does seem to me to be a little unfair. In this case the employee is not a director.