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Reasons for a Director's NI calculating incorrectly

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Summary

This guide explains why director's NI may not be calculating as expected in Sage 50cloud Payroll and how to check and resolve this.

Description

If a director's NI is not calculating correctly, there are a few things we can check in the software. Let's look at these now.

Resolution

Director status is not set correctly

To check the Director Status:

  1. Click Employee then click Employee Record.
  2. Click Employment.
  3. Check which Director Status the employee is set up as: Director or Director (Table Method).
  • If they are set up as Director and their earnings have not yet reached the 2020/2021 annual NI Primary Threshold (PT) of £9500.00 then no NI is due.
  • If they are set up as Director (Table Method) they will pay NI before reaching the annual PT of £9500.00.
  • If they are set up as Director (Table Method) and it is the last period in the tax year, or the Final Pay Run check box is selected, the NI is recalculated using the annual NI bands.

If the employee has been processed using the incorrect director status, you must roll back the employee to the first pay period they were processed incorrectly and process them again up to date.


Director status changed mid year

There's legislation in place to determine which changes you can make to an employee’s director status part-way through the tax year.

  • You can't change a Director (Annual basis) to Director (Pro-rata basis) part-way through the tax year.
  • You can't change either type of director back to a Non-Director during the tax year. If they're demoted to a normal employee, you should continue to process them as a director until the end of the tax year.

These changes will result in the director's NI being calculated incorrectly.

If either of these changes have been made in the software, to resolve this you need to restore a backup or recover the data back to before the change was made. Once done, you then need to reprocess any payroll ran since the backup was taken and submit an FPS adjustment to inform HMRC of the changes.


The directorship start date is incorrect

When you set the employee's Director Status to Director or Director (Table Method), the directorship began date defaults to the process date in Sage 50cloud Payroll on the date the change is made.

If the date directorship began is incorrect, it affects the annual NI bands used to calculate the NI, causing NI deductions to be more or less than they should be.

To check the directorship start date:

  1. Click Employee then Employee Record.
  2. Click Employment then YTD Values.
  3. Click Director's NIC.
  4. Check the Date Directorship Began.

If the employee became a director mid-tax year

The date directorship began must correctly reflect when the employee became a director. If the date is incorrect, rollback to the first pay period that they were paid, correct the directorship start date and reprocess the employee up to date.

If the employee has been director all tax year

Correct the date directorship began then Save the employee's record. The software will recalculate the correct NI for the director in the next pay period.


The pay frequency is incorrect

If the employee is set to Director (Table Method) it's important that the pay frequency is set correctly so that the correct NI bands are used in the NI calculation. For example, if the pay frequency is set to Monthly but the director is paid a weekly salary, they will pay no, or very little, NI as Payroll is using the monthly NI bands.

To check the employee's pay frequency, click Employee then click Employee Record then Employment.

If the pay frequency was set incorrectly, you must rollback the employee to the first pay period they were paid using the incorrect pay frequency, then reprocess the employee up to date.


The NI year to date values are not correct or have not been entered

As a director's NI is calculated on a cumulative basis, not period by period like a normal employee, it's important that their NI year to date (YTD) values are entered correctly. If the values were entered incorrectly, you must rollback the employee, enter the correct YTDs and reprocess the employee up to date.

To check the director's YTDs:

  1. Click Employee then Employee Record.
  2. Click Employment then YTD Values.
  3. Click Director's NIC.

For more information about processing director's NI, refer to the following article >


The final payment check box is selected in Enter Payments

If the employee is set to Director (Table Method) their NI is calculated every time they're paid. At the end of the tax year, or when they leave, it's recalculated on a cumulative basis.

If the employee is leaving and this is their final pay period, ensure that the Select this check box if your employee is leaving and this is their final payment check box is selected.

To check if this is selected:

  1. Select the employee on the Employee List
  2. Click Payroll then click Enter Payments.

If the check box isn't selected on the director's final payment, it needs to be selected. If it has been selected in error, deselect the check box.

If the check box was set incorrectly in a previous period, a rollback is required. The employee can then be processed correctly.


Other reasons for NI not calculating

If it is none of the above, other common reasons for any employees' NI not calculating are:

  • Their record is set to Manual NI.
  • Their date of birth is incorrect, making them younger than 16 years old.
  • Their payments/deductions are not subject to NI.
  • The customer is using an incorrect version of Payroll.
  • The NI bands and rates are set incorrectly in Legislation settings.

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