NICs Thresholds and Limits – Legislative in place for April 2009 changes

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From 6 April 2009, the new “upper accrual point” (UAP) replaces the “upper earnings limit” (UEL) for the purpose of limiting the amount of earnings on which a contracted-out rebate or minimum contribution is payable and which are taken into account in calculating accrual entitlements for the state second pension.

The levels at which the NICs thresholds and limits are set for each tax year are defined in regulations 10 and 11 of the Social Security (Contributions) Regulations 2001 (SSCR). The figures are not given for all pay frequencies, so regulation 11 also defines the method that is used to calculate what are called the “prescribed equivalents”. For example, the lower earnings limit (LEL) for 2009/10 is £95 for one week. The LEL for employees with fortnightly or four-weekly earnings periods is simply the appropriate multiple of £95. For monthly earnings periods, £95 is multiplied by 52, divided by 12 and rounded up to the next whole pound.

When the new UEL was announced in the Pre-Budget Report in November 2008, figures were quoted for some of the prescribed equivalents that did not match the statutory method of calculation in regulation 11. We queried the apparent errors and were advised by HMRC that, from April 2009, the calculation method would change and be brought into line with that used for the earnings threshold (ET). To achieve this, new amendment regulations were made on 29 January and come into force on 6 April 2009.

The effect of the amendments to the SSCR is that there are two different methods of calculating the prescribed equivalents for the four thresholds and limits. As most payroll systems use the “exact percentage” method of calculation NICs (rather than the NICs Tables) and, as a result, the same method must always be used for any manual gross to net calculations, it is important that the following calculation procedures are clearly understood.

1. LEL and UAP – These are defined just as a value for one week. The prescribed equivalents for other earnings periods are calculated as follows:
   • multiples of a week: Multiply the weekly LEL and UAP by the number of weeks.
   • one month: Multiply the weekly LEL and UAP by 52 and divide by 12. Round the result up to the next pound.
   • multiples of a month: Multiply the weekly LEL and UAP by 52, divide by 12, and multiply by the number of months. Round the result up to the next pound.
   • periods that are not multiples of a week or month: Divide the weekly LEL and UAP by 7, and multiply by the number of days in the earnings period. Round to the nearest penny (0.5p rounds down).
2. ET and UEL – These are defined as three values – the values for one week, one month and one year are all quoted in the regulations. However, it is the annual value that is used when calculating the prescribed equivalents, as follows:
   • multiples of a week: Divide the annual ET and UEL by 52, and multiply by the number of weeks. Round the result up to the next pound.
   • multiples of a month: Divide the annual ET and UEL by 12, and multiply by the number of months. Round the result up to the next pound.
   • periods that are not multiples of a week or month: Divide the annual ET and UEL by 365, and multiply by the number of days in the earnings period. Round to the nearest penny (0.5p rounds down).

If you would like to try out these calculation rules, the following Table provides the figures that are actually defined in the legislation for 2009/10, with boxes to enter the calculated equivalent values for other pay frequencies. The answers are at the end of this newsletter.

The amendment regulations also make statutory provision for the inclusion of the UAP in connection with

• the recording by employers of each employee’s earnings between the ET and the UAP, and between the UAP and the UEL
• the reporting of these earnings splits on the year-end P14 and P60 returns.

Further information:
The Social Security (Contributions) (Amendment) Regulations 2009
Explanatory Memorandum to the Social Security (Contributions) (Amendment) Regulations 2009
The Draft Social Security (Contributions) (Amendment No. 2) Regulations 2009
Explanatory Memorandum to the Draft Social Security (Contributions) (Amendment No. 2) Regulations 2009

This entry was posted on Monday, February 16th, 2009 at 05:00 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.