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Simon Parsons updates us on...

New NIC Upper Accrual Point set to cause wider impact

April 2009 will see the biggest revision to National Insurance since the introduction of the earnings thresholds: the Upper Accrual Point (UAP). This revision is set to allow the Upper Earnings Limit (UEL) for National Insurance to be aligned with the higher rate threshold for income tax.

National Insurance Contributions (NICs) have generally been perceived as a potential insurance contribution for an employee’s future. The UAP, on top of the previous introduction of the 1% NHS tax increases taxation on high earners: an additional 11% on employees, and an additional 12.8% on employers is applied to any earnings from the UAP to the revised and rapidly rising Upper Earnings Limits (UEL)

Also note that the introduction of the UAP will also have implications for the payroll recording of NICs, as an additional band of earnings will required to be recorded on both the P11 and P14.

Is the impact purely a revision of the calculation and recording of NICs?

The reality is - National Insurance earnings bands are often also used for other purposes, including calculations for occupational pension schemes.

Calculating NICs can be a complex task, and even more so for Directors who may have multiple NIC categories in use. Employees may also find it a grueling task, especially if they have more than one concurrent employment instance with the same employer, where one has earnings within a contracted-out-occupational pension scheme and the other doesn’t – this is referred to as an aggregation or split rate NICs.  

In this circumstance, the Key judgment points when working out NICs has been the Lower Earnings Limit (LEL) and the UEL. With the onset of the change, systems and calculations will need to be revised to now refer to the LEL and UAP. Illogical to the outsider, aggregation rules (which also apply to directors) require NIC earnings to be recorded according to liability as opposed to employment.

For example:

• Where earnings in employment 1 are under the LEL but with the addition of earnings from employment 2 the earnings are above the LEL, then all earnings are treated for NIC purposes as earned under the NIC category for employment 2.

• Where earnings in employment 1 and 2 all fall between the LEL and UEL, the earnings are recorded for each separately.

• Where earnings in employment 1 exceed the UEL and there are also additional earnings from employment 2, then all earnings are recorded for NICs purposes under the NIC category for employment 1.

This all potentially changes, as the judgment of where earnings are recorded will be different to the LEL and UAP (it’s all a question of where NIC rebates are due).

Contracted-out pension schemes

Some occupation pension schemes (primarily contracted-out money purchase schemes), pay a minimum contribution amount of employee and employer contributions, which are assessed on earnings between the LEL and UEL. The introduction of the UAP will also mean that the minimum funding requirement will be judged on earnings between the LEL and UAP. If this applies to your scheme, then the scheme rules may need to be revised, and information on the basis of contributions will need to be communicated to the impacted employee.
For all contracted-out pension schemes, employees will now receive rebates on earnings between the Earnings Threshold (ET) and the new UAP and employers on earnings between the LEL and the new UAP.

Some pension schemes still report an out-of-date contracted-out earnings value, a term that hasn’t been used by HM Revenue & Customs for some years – this is traditionally the earnings of an employee between the LEL and the UEL. The recording of NIable earnings and contracted-out earnings ceased many years ago having been replaced over time by earnings between LEL, Primary Threshold, Secondary Threshold, and UEL. The current practice of recording earnings at LEL, LEL-ET and ET-UEL is now extended to be: at LEL; LEL-ET; -ET-UAP; and UAP-UEL.

Some pension schemes may have continued to record the former contracted-out earnings by adding all earnings between the LEL and UEL – from April 2009 this will be incorrect as the earnings which truly attract contracted-out rebates will be revised to be those from LEL-UAP.

Employers and pension schemes should review to see if there is a need to change scheme rules with regards to what is recorded for contracting-out purposes.

Additionally many occupational schemes also calculate employee and employer contribution amounts based on the LEL and UEL as part of their scheme rules. If this applies to your scheme, then this needs to be reviewed - Should the new boundaries on contributions now use the UAP instead of the UEL?

In Summary:

• Review calculation of Directors and Aggregation NICs in light of the introduction of the UAP
• Review Pension calculations and recording requirements as a consequence on the new UAP.
• Ensure that software and service provision is appropriately changed if impacted by the introduction of the UAP