One of our clients raised an interesting query recently. He had two payrolls each with a director appointed in March 2015. One was appointed on the 1 March 2015 and the other on 31 March 2015.
His query was the calculation of the Director’s NIC in Keytime Payroll – both directors were receiving a £10,000 payment in March, yet the director who was appointed at the beginning of March was paying more NIC than the director who was appointed later.
As I’m sure we all know when a director is first appointed, their annual earnings period has to be calculated on a pro-rata basis for the remainder of the year. This method of calculating NI applies even if the director resigns part way through the tax year.
Logic wants to tell us that the director appointed at the earliest date would have more of the threshold available than the director appointed later and would, therefore, pay less Employee NIC. The opposite, however, is true; the director appointed at the end of the month pays a lower figure of NIC than the one appointed at the beginning of the month.
Cue much scratching of heads…the explanation is, of course, that as the year gets shorter the thresholds reduce but when you get to a certain point in the year (January as it transpires) the appointee at the month end has less threshold left at the 12.5% rate than the appointee at the beginning of the month and thus moves to the 2% rate sooner and so ends up paying less.
This is illustrated by the two screen shots below taken from HMRCs on-line calculator, albeit, using the current year as a base:
As you can see the difference on the £10000 payment in March is £251.70 less NIC for the appointee at the month end. Worth bearing in mind…