Replies to Queries - 4 - Nicked

As with several small businesses, we have wives and children earning £87 per week in order to maximise their allowances.

However, we are slightly confused about their entitlement to social security benefits (namely state pension), as we have been informed a pay-as-you-earn scheme needs to be set up even if no contributions are due and there is only one employee, in order to prove such entitlement.

Furthermore, in various tax allowance tables, entitlement to contribution-based benefits appears to relate to earnings between £72 and £87 per week.

I should be grateful if any reader could clarify this matter.

(Query T15,911) – Puzzled.

Prior to the introduction of the earnings threshold on 6 April 1999 (at first confined to only the employer's portion), great store was set by politicians and the then Contributions Agency/Department of Social Security on the fact that the contributory record of low earners was to be protected. It therefore continues to be the case that, for example, for a tax year to count as a 'qualifying year' for retirement pension purposes all that is needed is 52 weeks of earnings at or above the lower earnings limit (on which National Insurance contributions are now nil). Alternatively, earnings of twice the lower earnings limit but for only 26 weeks would suffice, as it is possible to 'mix and match'. What it is not possible to do is to count in at all any earnings of any pay period in which earnings fall below the lower earnings limit, even if there are other periods where earnings go above that level.

Unfortunately, the only means by which the admirable objective can be achieved – according to officials – is by continuing to report, through the P11/P14/P60, earnings at and above the lower earnings limit, regardless of the actual liability position.

'Puzzled' does therefore need to ensure that the client completes the relevant documentation (the National Insurance contributions Tables helpfully confirm that the contributions at these lower levels is nil, and gives the entries for column 1b, 1c, etc.); otherwise the planning behind what is happening will not work in practice. Incidentally, the wages should be actually, physically 'paid' and not merely adjusted through capital account or by subsequently allocating part of drawings for housekeeping, say. Compliance with the National Minimum Wage and Working Time Directive also needs to be checked. Although there are certain opt-outs for the latter, these must be recorded, and for the national minimum wage the exemptions will not apply if, for example, children are not living at home or trade is through a limited company.

Even if the employer is not concerned about the employees' contributory benefit entitlement, the Inland Revenue is. This is why the Social Security (Contributions) Regulations 2001at paragraph 13(b)(i) of Schedule 4 says 'the employer shall record on the deductions working sheet … the amount of earnings up to and including the current lower earnings limit where earnings equal or exceed that figure'. So there is no choice on the employer's part and non-compliance on these grounds alone will attract the usual penalties for non-completion – or complete absence.

In theory, and I suppose it could happen if an employer with a contracted-out scheme ceases trade in March and makes a small, late payment to an employee shortly after 5 April, the only National Insurance contributions in point could be a refund of contracted-out rebate where the earnings fall short of the earnings threshold (or only slightly exceed it). If no documents were submitted, no doubt the Inland Revenue would set off the trifling rebate against the penalty! – PAM.

For a long number of years our National Insurance contributions system worked on the basis of the contributory principle, i.e. you had to pay a certain minimum level of contributions in a specific period to qualify for benefits. That principle began to change in April 1999 when the Labour Government removed National Insurance contributions liabilities on earnings up to and including the pay-as-you-earn threshold in an attempt to encourage employers to take on lower-paid staff and so reduce unemployment. Taking lower-paid employees out of contribution liability would clearly penalise them under the contributory principle and so a nil rate of contribution was introduced for those earnings which fall between the National Insurance contributions lower earnings limit and the PAYE threshold. Where an employee had sufficient such earnings – in the current year the minimum level of earnings is £52 x £72 = £3,744 – his benefit rights would be automatically protected.

Pension rights are built up over a working life and benefits are awarded based on the information recorded on personal accounts identified by individual National Insurance numbers held on the Newcastle computer system. It follows, therefore, that a return has to be made each year to the Inland Revenue if credit is to be given for those earnings where the nil rate of contribution applies. If you look at the P14 return, you will see that there is a separate box to record those earnings which fall between the lower earnings limit and the threshold.

Going forward, there has to be a little bit of doubt as to whether such earnings are helpful. For youngsters aged 16 or over the earnings could help build a contribution record particularly if they are at University and not receiving National Insurance credits. For a working wife, however, the position is much less clear. Whether a pension is payable will depend on her previous contribution record and her age in relation to her husband. I say this because when the husband reaches age 65 and she is at least 60 then, based on his National Insurance record, she will receive 60 per cent of his basic retirement pension. Where a woman has a record with a number of missing years it is unlikely that she will create an entitlement of more than 60 per cent, so the additional earnings are in fact of little use. – FATMAN.

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