There are two common situations where an overpayment of national insurance (NI) will arise. The situations are when (1) an individual has more than one employment with substantial earnings in each and (2) an individual has an employment but is also self-employed.All earners have an overall maximum, where only a prescribed amount of earnings are chargeable at the highest rate of NI. In the situations stated above, applying the NI rates normally will give rise to an overpayment. This can often be overlooked by both the client, who is not aware of the problem and the adviser who may be too busy dealing with the tax return deadline rush to notice the problem.
Depending upon which type of national insurance is being paid (Class 1 for employed earners, or Classes 2 & 4 for the self-employed) there are annual maximum amounts payable at the highest rate in any year. Using the annual maximum rates it is possible to determine the refund that would arise.
1. Employees paying Class 1 NI
For Class 1 NIC’s the annual maximum for 2014/15 is £4,146.72.
Eg. Alan has two unconnected employments in 2014/15, one with earnings of £30,000 the other £50,000, His likely overpayment is as follows
Employment 1: Gross salary £30,000:
Alan pays 0% on the first £7,956 and 12% on the remaining £22,044 = £2,645.28
Employment 2: Gross salary £50,000:
Alan pays 0% on the first £7,956, 12% on the next £33,904 = £4,068.48, and 2% on the remaining £8,140 = £162.80
Therefore, £4,068.48 + £2,645.28 has been paid at the maximum rate (12%) = £6,713.76, but because the annual maximum is only £4,146.72, an overpayment refund will arise. In broad terms the surplus earnings should only be charged at 2%, so the overpayment arising is (£6,714.36 – £4,146.72) x 10/12 (because 2% is still chargeable) = £2,139.20.
2. Self Employed paying Class 1 and Class 2 & 4
For Class 2 & 4 NIC’s the annual maximum in 2014/15 is £3,197.56. This time Alan has an employment where he earns £30,000 as before, but this time he has profits from self-employment of £50,000. His overpayment in 2014/15 is as follows:
Employment 1: Gross salary £30,000. As before, total NIC’s = £2,645.28
Self Employment: Profits £50,000:
Class 2 NIC: Alan pays £2.75 for each week of self-employment = £143.00
Class 4 NIC: Alan pays 0% on the first £7,956, 9% on £33,909 = £3,051.81 and 2% on the remaining £8,135 = £162.70.
His Class 1 NI is left intact, as this takes precedence over the Class 2 & 4 contributions. To calculate the overpayment we first identify the class 4 NI chargeable at the higher rate by deducting Class 1 payments from the annual maximum, so that £3,197.56 – £2,645.28 = £552.28 represents Class 4 NI due at the higher rate of 9%. As Class 4 of £3,051.81 has been paid at the maximum rate (9%) instead of the 2% rate, this gives rise to an overpayment of (£3,051.81 – £552.28) x 10/12 (because 2% is still chargeable) = £2,082.27.
Those affected by this situation can avoid overpayments by making a claim to defer national insurance on the second employment or the self-employment, so that national insurance on these sources is only paid initially at 2%. This should prevent overpayments and allows HMRC to issue a calculation later to identify the additional NI due at the higher rate accurately.
Claiming the refunds
In some situations, it will be too late to make a claim to defer payment and a claim for refund will be necessary. Claims for a refund of surplus Class 4 NI can be made up to 5 years following 31 January after the year of the overpayment and should include all years affected. Claims for overpaid class 1 can be made within 6 years of the year of the overpayment.
We have a good track record in making these claims where there are multiple years and obtaining the refunds quickly. Please feel free to contact your Forbes Dawson contact if you need any help with these.
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