01 December 2020

Peter Minchinton, employment taxes senior manager at PSTAX, discusses the implications of a question which has recently arisen at a NHS Trust and could be set to become a major national issue

Where an employee has more than one job with the same employer, the employer must consider whether the earnings need to be aggregated for the purposes of calculating class 1 National Insurance contributions (NICs). ‘Aggregation’ here is the process of adding together the earnings from two, or more, employments and calculating NICs on the total.

Currently the National Health Service (NHS) Trust in question has employees who are paid via both the substantive monthly payroll and, from time to time, the weekly ‘bank’ payroll. The Trust calculates the class 1 NICs on both the weekly and monthly earnings using the monthly payroll.

HM Revenue & Customs (HMRC) has advised the Trust that NICs on all the earnings must be calculated using a weekly earnings period.

The impact of using a monthly earnings period, rather than weekly, is that employer (secondary) NICs are under-deducted but employee (primary) NICs are over-deducted. The HMRC view is that they will collect the underpaid employer NICs – which, in this instance, could be around £250,000 per year – but will not repay the annual overpaid employee NICs of circa £1,240,000. Bear in mind that these sums are for just one NHS Trust.

We have been advised that HMRC will be taking action to address this matter across the sector. At this stage, however, it is unclear whether HMRC will approach NHS Business Services Authority (BSA), which is responsible for the Electronic Staff Record (ESR) payroll used by NHS Trusts, consider the wider implications and issue revised guidance, or whether it will try and pick-off Trusts one by one through employer compliance reviews.

What is the position in law?
The relevant legislation is contained in the Social Security Contributions and Benefits Act 1992 and the Social Security (Contributions) Regulations 2001. Regulation 14 of the latter allows employers not to aggregate where, due to calculating earnings separately, it is ‘not reasonably practicable’ to do so.

This is a complex area with a considerable history across public bodies. There were several contentious cases involving local authorities around fifteen to twenty years ago, where the key issue was how what is now Regulation 14 should be interpreted. The term ‘not reasonably practicable’ is not defined in NICs legislation, so HMRC uses its ordinary meaning.

HMRCs National Insurance Manual (https://bit.ly/2HUh7D3) provides a detailed description of the ‘not reasonably practicable’ test, based on the available case law. Importantly, HMRC observes that it can be ‘reasonably impracticable’ to aggregate earnings on the grounds that they are separately calculated, even if the employments concerned are with the same employer and covered by the same payroll system. Its guidance also acknowledges that the cost to the employer is to be taken into account, not only in terms of finance, but in terms of time, effort and the effect on the business because “the weight of the cost of compliance should not be disproportionate to the loss of [NICs] and benefit entitlement”.

The guidance is written in a way which places the burden of proof on the employer. To justify such a decision the guidance states that the employer must consider the potential costs involved in aggregating and also the impact on employees who may, due to the failure to aggregate, end up without a NICs record and no entitlement to related benefits.

But how is this relevant in the case of the NHS Trust in question? The Trust has found a way to aggregate but only by using the monthly earnings period to do so.

Regulation 6 sets out the earnings period over which NICs must be calculated. Where there are different earnings periods, and the earnings fall to be aggregated, then the regulation prescribes the period to be used as the shortest one. In this instance, this is one week.

So, this returns us to the question of whether aggregation is ‘not reasonably practicable’. Aggregation using monthly earnings period is, clearly, reasonably practicable, since this is achieved by the Trust and many other Trusts using ESR capability. However, the true test here is whether aggregation using a weekly earnings period is ‘not reasonably practicable’.

Let us return to that point later, after establishing how these different methods of aggregation impact on the numbers in the worked examples.

The ‘wider’ issues
This is clearly a matter of principle rather than being about a loss of NICs to the Exchequer. Indeed, using the legislative method, the Exchequer would lose out overall, as shown above.

We have sympathy with the view that employees should not be facing an additional NICs cost due to use of a monthly earnings period, rather than weekly. But can aggregation be achieved using a weekly earnings period?

Over the course of a tax year, there would be twelve weeks where there was both a monthly and weekly payment, with forty weeks where there was just a weekly payment.

Such a calculation would depend on several factors; for example: can monthly pay be processed during the period of a single week? Weekly pay would seem to be simpler to process because it is based on time input during a set period, whereas monthly pay would seem to carry more complexity such as around incremental pay, overtime, salary sacrifice, termination issues, etc. However, we have been reliably informed that ESR has advised that aggregation using a weekly earnings period is not something that it can currently cope with.

Should ESR have to find a way to do it? Or can Trusts fall back on the ‘not reasonably practicable’ reason? This may be the crunch question.

Since we are advised that ESR cannot, sensibly or reasonably, aggregate earnings using a weekly earnings basis, the Trust would appear to have taken the ‘least criticisable’ option of aggregating based on monthly earnings periods rather than not aggregating at all. Is it right for that approach to lead to a retrospective settlement of employer NICs?

If there are to be changes introduced by NHS Trusts as a result of this issue, we believe that should be a national matter first considered by a number of relevant stakeholders, including the Department of Health and Social Care, the NHS BSA, and staff representatives across the NHS. If, as HMRC advises, this is already a national issue and being pursued, then employers need to see the relevant communications across the stakeholder group and any professional advice obtained, so that proper consideration to the matter can be given, going forward.

It remains to be seen how HMRC will seek to deal with this matter. One would hope that common sense will prevail. Stakeholders should be invited to contribute to the discussion, particularly ESR, and a national strategic approach adopted, with updated HMRC guidance as appropriate. Then, and only then, should employer compliance officers come sniffing for retrospective liabilities, interest, and penalties.

Worked examples

Scenario A (monthly earnings period)

Week 1: £225.00

Week 2: £187.50

Week 3: £275.00

Week 4: £187.50

April: £5,333.00

Total pay: £6,208.00

Total Employee NICs = £445.82

Total Employer NICs = £758.44

Scenario B (weekly earnings period)

Week 1: £225.00 Employee NICs = £5.04 Employer NICs = £7.72

Week 2: £187.50 Employee NICs = £0.54 Employer NICs = £2.55

Week 3: £275.00 Employee NICs = £11.04 Employer NICs = £14.62

Week 4 (including April monthly pay): £187.50 + £5,333.00 Employee NICs = £184.65 Employer NICs = £738.43

Total Employee NICs = £201.27

Total Employer NICs = £763.32

Comparing the total NICs due in each scenario reveals that scenario A leads to higher employee NICs of £244.55 (i.e. £445.82 - £201.27) but lower employer NICs of £4.88 (i.e. £758.44 - £763.32), than the amounts obtained when using a weekly earnings period.

Featured in the December 2020 - January 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.