Most people will be familiar with the concept that the amount of tax due to be paid by an individual is based upon their total income throughout the tax year. Where the individual is employed, income tax is collected through the payroll in accordance with the PAYE regulations.
Employees will be familiar with the deduction of Class 1 National Insurance from their salary via the payroll, however their employer is also required to pay Class 1 National Insurance, known as secondary contributions on the salary paid. Generally speaking, National Insurance is calculated based on the employee’s earnings period, for example weekly or monthly. However, it is not uncommon within the care sector for employees to have more than one employment contract with the same employer; the amount of National Insurance due needs to be calculated based upon the aggregation of earnings from the two employments.
This can prove to be challenging for employers for several reasons:
- Identifying whether the employee has more than one employment.
- Different earnings periods, for example, the employee is paid monthly for their regular employment but weekly for any bank work performed.
- Different PAYE schemes may apply depending upon whether the salary is paid weekly or monthly.
Social Security regulations allow employers not to aggregate earnings where, owing to the different factors outlined above, it is “not reasonably practical” to do so. What is unhelpful is the lack of any statutory definition for the term “not reasonably practical”.
HM Revenue & Customs (HMRC) does recognise that the costs should not be disproportionate to the loss of National Insurance and the benefit entitlement when considering how and whether the aggregation rules can be applied. The onus is placed upon the employer to demonstrate where it is not practical. Employers should not proceed on the basis they will fall within the scope of the exclusion. Where employees work under more than one arrangement with the same or connected employers (for example, employers within the same corporate group), consideration needs to be given to the practical steps which need to be taken to ensure the correct amount of Class 1 National Insurance is paid in the same earnings period. HMRC guidance is to calculate the contributions due by applying weekly earnings periods. This may require “manual intervention” when calculating the amounts due.
The challenge
The challenge around the aggregation of earnings has commonly occurred with NHS Trusts. However, where, for example, care providers have “bank” staff arrangements, then it is highly likely the aggregation of earnings regulations are likely to apply. If the arrangements across the organisation are not reviewed, there is the potential risk of an underpayment of Class 1 National Insurance that will be incurred, mainly as a result of both the employee and employer benefiting from more than one lower earnings threshold.
Employers also need to be mindful that during the current (2022/23) tax year there will be changes to the National Insurance primary threshold limits (increasing from £9,880 to £12,570) from 6 July 2022, but the upper earnings limit will remain at £50,270.
In addition to the changes in the primary threshold limits, employers and employees also saw the introduction of the Health and Social Care Levy, effective from 6 April 2022. For the current tax year this has taken the form of an additional 1.25% increase in both the employee and employer National Insurance rates. The temporary increase in the rate of National Insurance will also apply to both the Class 1A and 1B (employer only) National Insurance rates which apply to the provision of benefits in kind and taxable expenses.
However, from 6 April 2023 a standalone levy of 1.25% (applicable to both the employee and employer) will come into effect and the National Insurance rates will revert to their pre-6 April 2022 rates (12% employee and 13.8% employer).
Employers need to take care when managing employees who are engaged under more than one employment contract to ensure the correct tax and National Insurance treatment is being applied to their salary.
Nick Bustin is employment tax director at haymacintyre
