If an employer makes a payroll error they will need to put it right. However, the way to do this depends on when the error occurred and is detected. Here is a handy recap of the rules for different years, and how to deal with any NIC issues which may be caused by payroll errors.
Current tax year errors
Payroll mistakes identified before the end of the current tax year can be corrected by updating the year-to-date figures in your next Full Payment Submission (FPS).
If your employee’s NIC deductions are affected, you’ll also need to repay them any excess or deduct any additional amounts due.
If the error meant the employee underpaid NIC, the employer must ensure any shortfall is paid to HMRC without delay. But the amount of additional NIC you can deduct from the employee to make up for any shortfall caused by the error is restricted to no more than the amount of NIC they would normally pay in the month when you collect the shortfall. Any amount still due from the employee to make up for the error must be collected in a subsequent month.
For example, a payroll error is identified which resulted in £100 of employee NIC being underpaid in January, when a bonus was paid. In February, no bonus was paid and the employee’s NIC liability is only £80. The maximum employees’ NIC which can be deducted in February is £160 (£80 for the normal NIC liability and a further £80 towards the January underpayment). The remaining £20 of NIC underpaid will need to be collected in March.
The employer has until 5 April following the end of the tax year in which the error occurred to collect the amounts due, which should be plenty of time to make good any small errors.
Errors in the previous three tax years (6 April 2020 to 5 April 2023)
If you made a mistake reporting pay or deductions for any of these years, an FPS needs to be submitted showing the corrected amounts.
If you either deducted or reported too much NIC and you are unable to repay the employee (eg because they no longer work for you), you will also need to write to HMRC and include specific details regarding the error, including: how much you overpaid National Insurance contributions and why, which tax years you overpaid in, and why you are unable to make the payment to the employee.
Errors in tax years 6 April 2017 to 5 April 2020
Payroll errors relating to the 2018/19 and 2019/20 tax years can either be corrected by submitting a corrected FPS, or an Earlier Year Update (EYU). Mistakes made in the 2017/18 tax year can only be corrected via an EYU.
Any difference in the NIC liability due to correcting the error will mean an EYU has to be submitted regardless of when the mistake was made. This should show the original and corrected deductions. If NIC has been overpaid, the NIC refund indicator should be set to ‘No’ if you have not refunded the employee (for instance because they’ve moved jobs). Further guidance in respect of these years can be found on GOV.UK.
This article reflects the position at the date of publication (14 November 2023). If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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