Employers may be liable for under-deductions of PAYE & NIC's

Posted on 18 August 2011 by Noreen Munro

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Many employers are not aware that if an employee who is paid through their employer's PAYE scheme underpays tax or national insurance due to an error, the employer is liable to pay the shortfall in most cases.

Typical errors arising in underpayments would be:

  • New starter's P45 not actioned or input incorrectly
  • Incorrect tax code applied for the P46 statement signed by employee
  • HMRC tax code notification (P6 or P9) not actioned
  • P38(S) form used in error for a student working in term time
  • Payroll software not updated with legislation changes
  • Anomalies in employee cumulative pay and tax figures
  • Incorrect NI category applied to employee record
  • Human error

However, in some cases an employer may be able to recover the underpaid amount from the employee if the error that caused the underpayment was made in good faith.

This may be because:

  • The tax code or pay and tax to date figures on the employee's P45 were incorrect
  • This is the employee's secondary job but they have given you a P45 form with a personal allowance tax code
  • The employee signs the wrong statement on their P46 (E.G. they may tick statement 'A' resulting in the emergency tax code being applied on a cumulative basis in error)

Recovering underpaid NIC's from the employee

If the employer can demonstrate that they have taken all reasonable steps to ensure the accurate calculation of national insurance, they may use special rules to recover the underpayment from the employee.

This is done by increasing the amount of employee deductions in subsequent payments. However the additional deduction can be no greater than the NI contribution due in the current period.

Example:

An employee has underpaid £200 NI and the employer has satisfied that the error was made in good faith. On the employee's next pay date, they earn £300.00 gross and would ordinarily pay £19.38 NI. This can be doubled to £38.76 resulting the in the carried forward overpayment figure being £180.62 (£200.00-£19.38).

Extra deductions can be made from the employee's pay for the remainder of the current tax year and the whole of the following tax year. However, if at the end of the following tax year, the full amount has not been recovered from the employee, the employer becomes liable for the remainder of the underpayment.

Recovering underpaid PAYE

As a general rule, the employer is liable for any PAYE that is under-deducted. However, if the employee believes that they can demonstrate that the error occurred in good faith (E.G. the employee has given incorrect information on form P46), they may be able to obtain a special direction from HMRC allowing them to recover the underpaid amount from the employee.

Further information can be obtained from HMRC or found in the manual CWG2 Employer Further Guide to PAYE and NICs

Liabilities such as this only highlight the importance of ensuring that payroll records are maintained using HMRC accredited payroll software and managed by an experienced payroll professional.

General Advice

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