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Common reasons for incorrect national insurance deductions

Created on  | Last modified on 

Summary

The information that affects the National Insurance (NI) calculation and how to change this in Sage Payroll.

Resolution

Incorrect NI calculations can occur if any of the following types of information are incorrect:

NOTE:

Directors NI calculates differently. To find out more, read Directors National Insurance.

NI category

The employee’s NI category determines the NI tables used to calculate NI deductions. If you enter the wrong NI category, incorrect NI deducts.

▼To check the employee’s NI category
  1. Select Employees from the menu bar.
  2. Select the relevant employee.
  3. In the Current Tax Details section, check the NI category.
  4. If the details are incorrect, make the necessary changes.

If you’ve processed your employees on the incorrect NI category, you need to correct this. Read our article make Make corrections to a completed pay run. Use the correct NI category.

Date of birth

Employees don’t start paying NI until they’re 16, so make sure the employee’s date of birth is correct

 ▼To check the date of birth

  1. Select Employees from the menu bar.
  2. Choose the relevant employee.
  3. In the Personal Details section, check the Date of Birth.
  4. If it’s incorrect make the necessary change.

If you’ve processed the employee with the incorrect date of birth, correct their date of birth. Select Save. Next, follow our article Make changes to a completed pay run. 

If you corrected the date of birth before completing payroll:

  1. Delete the hours from each payment and deduction in this pay run.
  2. Re-enter the payment and deduction values.

This will force the NI to recalculate using the correct date of birth.

Earnings subject to NI: Payments

An employee only pays NI on gross pay that’s subject to NI. For example, a business expenses payment type isn’t subject to NI.

Any payment that doesn’t increase the NI value in the Edit Pay stage of a pay run is a net payment. It isn’t subject to NI calculations.

▼Check the payment setup
  1. Select Settings from the menu bar and then Payment & Deductions.
  2. Choose the payment you want to check.
  3. In the Defined as section, check the payment is subject to National Insurance.

If it isn't, change the name and description to ‘Don’t Use’. Set up a new payment for the intended purpose, naming and describing it appropriately.

  1. Correct any completed pay runs that used the incorrect payment. Replace it with the new payment.

Earnings subject to NI: Deductions

An employee only pays NI on gross pay that’s subject to NI. A gross deduction reduces the amount of pay the employee pays NI on, such as unpaid leave. A net deduction reduces the employee’s net pay after NI calculates, such as union fees.

Any deduction that reduces the amount of NI the employee pays when you enter its rate is a gross deduction:

▼To make sure the information is correct, follow these steps
  1. Select Settings from the menu bar, then Payment & Deductions.
  2. Select the Deductions tab and choose the deduction you want to check.
  3. Check the category.

If the category is Gross Deductions, the employee’s NI-able pay reduces by the amount of the deduction. This happens before NI calculates. The result is that the employee pays less NI.

If your intention wasn’t to reduce the Niable pay for the employee, change its name and description to Don’t Use'. Set up a new deduction to replace it.

  1. Correct any completed pay runs in which you used the incorrect deduction. Replace it with the new deduction.

Pay cycle

Payroll uses the HMRC weekly and monthly tables to calculate NI. So if the pay cycle is incorrect, the NI is incorrect.

EXAMPLE:

You set up a weekly paid employee as monthly paid in error. You can find that they don’t pay any NI at all, as their earnings are less than the monthly threshold for NI.

If you’ve completed a pay run using the incorrect pay cycle, you can’t re-process them using the correct pay cycle. Edit the incorrect pay run to reflect the amount of pay the employee will receive for that pay period.

  • If the employee should be on a weekly cycle but you included them on a monthly pay run. Increase the amount of pay they receive to a monthly amount.
  • If the employee should be on a monthly paid but you included them in the weekly pay run, reduce their pay to a weekly amount.
  • If you paid them on a weekly pay run in error, you need to pay them weekly for the rest of the tax month. Change them to monthly at the next available monthly period.

Read our article Change how often you pay an employee.

Holiday pay - Advanced holiday pay

If you believe the NI is too high or not as high as anticipate, check if you're using a Holiday Payment.

There are two types of holiday pay in Sage Payroll. Holiday pay and Advanced holiday pay.

Holiday pay is usually a salary or weekly payment, subject to PAYE and NI.

Advanced holiday pay - used to pay a weekly paid employee in advance for their holidays. This is also subject to PAYE and NI, but there's a difference in the calculation

NOTE:

Future pay runs exclude the employee for that period of their holiday. Still run payroll for each period of the employee holiday.

NI calculates per pay period.

This means if you pay the employee three weeks' pay in one pay run, they’ll pay too much NI.

▼Holiday pay example

In week seven, you’re paying your employee for that week, plus two weeks holiday. That's three weeks in total (week seven, eight and nine).

Your employee earns £300 per week.

You create a payment called holiday pay and pay the employee 3 x £300=£900.

The NI calculation used is:

 £900-£242 (primary threshold) x 12%=£78.96 

This doesn’t take into account the two holiday weeks NI free pay. The employee pays too much NI.

 ▼Advanced holiday pay example

Advanced holiday pay uses the free pay entitlement for each week into account.

That's £242 weekly allowance used each week of holiday taken.

The NI calculation is now:

£900 - (3 x £242) = £174 x 12% = £20.88

This takes into account the two holiday weeks NI free pay. The employee pays the correct amount of NI.

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