NI contributions are crucial to your entitlement to the state pension and other benefits, so it’s a very good idea to keep a close eye on them. But how can you identify and check if you’ve overpaid or underpaid contributions? Head of Payroll Department Joanne Gibson brings you up to date.
Whilst HMRC keeps a record of your NI contributions, it won’t automatically alert you to any shortfall unless it results from an obvious mistake in calculation. It’s also not very good at spotting and alerting individuals who have overpaid NI.
The likelihood of overpaying or underpaying NI contributions is greater if any of the following are true:
• You are employed and self-employed.
• You have two or more employments or directorships.
• Your work pattern and pay are irregular.
• You have gaps in your employment/self-employment record.
• You cease or commence a directorship part-way through a tax year.
In 2022/23 John had one employment earning £80,000 per year. He paid NI of just over £5,800. In the same year Lewis had two jobs with unconnected businesses, both paying a salary of £40,000 per year. He paid NI in excess of £7,600 even though his earnings were identical to John’s.
In this example, each employer has calculated the correct amount of NI for the employee’s pay, but this doesn’t prevent an overpayment of contributions because, unlike PAYE income tax, NI is worked out independently for each employment rather than as a whole. When added together the NI contributions exceed the maximum permitted. This is one scenario where HMRC should pick up an overpayment of NI but frequently fail to do so.
Unlike multiple employments, you won’t overpay NI contributions if you have more than one self-employment, e.g. you’re a sole trader as well as being a partner in a business. This doesn’t cause overpayments because your profits from all your self-employments are declared on your self-assessment tax return and your NI bill worked out on the aggregate of your profits.
Generally, if you’re self-employed or employed throughout a tax year, with no gaps in employment/self-employment, you should pay the correct amount of NI contributions. However, this doesn’t guarantee that the contributions are sufficient to count as a qualifying year for state pension purposes. For any pay period your earnings are less than the NI lower earnings limit, you won’t have a full year on your NI record.
However, only full years for NI contribution purposes count towards your state pension.
You can check your NI record quite easily and pay voluntary contributions to plug any gaps in your NI record. You should consider your income sources, if you have two or more employments, a mix of employment and self-employment or gaps in work there’s a greater risk of overpaying or underpaying NI contributions.
JRW’s team would be more than happy to assist with similar related issues, you can contact them here.