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Recovering underpayments of National Insurance Contributions (NICs) from your employees


Paragraph 11 on page 17 of booklet CWG2(2006), Employer Further Guide to PAYE and NICs covers situations where an employer discovers that the correct amount of primary National Insurance contributions (NICs) has not been deducted from an employee's earnings because of an error made by the employer in good faith.

It explains that where that error results in an underpayment of primary contributions, the employer has the right to recover the underpayment from the employee within certain limits. This note provides further detail about how and when such a recovery can be made.

What is an error in good faith?

An error in good faith is not defined in Social Security law. As a result HMRC will normally accept that errors in good faith are those involving genuine mistakes where the employer has proceeded with an honesty of intention when assessing the amount of NICs due. Good faith errors can include misunderstandings, mistakes of procedure and human error. The important consideration is that the mistake occurred at the time the earnings were paid and that the employer was genuinely unaware that he was making a mistake.

A deliberate failure to deduct NICs on certain types of payments, or the overturning of a previous decision not to deduct primary NICs from an employee's earnings are not errors in good faith. Although it is impossible to list every good faith error that can occur, the following are among the most common:

  • using out of date NICs percentage rates, limits or thresholds
  • deducting the wrong Class of NICs, for example paying Class 1A instead of Class 1 on a particular item of pay
  • deducting the wrong category of NICs, for example deducting contracted-out NICs for an employee who is not included in the employer's contracted out pension scheme.
  • arithmetical errors where either manual calculations were needed or where payroll data was input incorrectly
  • delays in notifications, for example, where one section delays notifying the payroll section of a change in the employee's circumstances,

How is the underpayment recovered?

The underpayment can be collected from extra deductions taken from later payments of earnings made to the employee after the error has been discovered. Two conditions are applied to the recovery. These concern the amount that can be recovered and the length of time over which the recovery can be made.

1. The amount that can be recovered

The extra NICs deductions can be no greater than the NICs deduction which is due on the earnings that are about to be paid.


An employee's share of NICs on a payment of earnings which is about to be made is £30. The maximum extra deduction that can be made from that payment is also £30, making a total deduction from those earnings of £60.

2. The length of time over which the recovery can be made.

The extra deductions can be made from any earnings paid to the employee during the remainder of the tax year in which the error was discovered and before the end of the next tax year.


An employer discovers a good faith error on 28th February 2007. He may make extra deductions from any earnings paid to the employee during the period 1st March 2007 to 5th April 2008. This means he has the remainder of the 2006/2007 tax year and the whole of the 2007/2008 tax year in which to recover the underpayment.

What should be reported on End of Year returns?

It is important to remember that, even if the employer needs to extend the recovery period into the second tax year, the contributions actually due for the year in which the underpayment occurred must be paid to HMRC at the correct time and must be recorded on the employee's End of Year Summary (form P14) for that year.


An employer holds a valid 'certificate of election' which authorises him to deduct contributions at the reduced rate for a female employee. The employee is divorced on 28th April 2006 and becomes liable to pay contributions at the full standard rate. The employer has in place arrangements for employees to notify changes to their marital status but, whilst the employee complies with these, the notification gets mislaid en route to the payroll department and it is not acted upon until July 2006.

As a result, an underpayment of primary contributions occurs during the period between the employee's divorce and the date the payroll section received the notification. Since the error giving rise to the underpayment was made in good faith, the employer can, if necessary, recover the underpayment from any further earnings paid to the employee in the remainder of the 2006/2007 tax year (Year 1) and the following year, 2007/2008 (Year2).

The employer must pay over the full amount of primary NICs due by the end of the 2006/2007 tax year and ensure that the 2006/2007 P14 for the employee shows the correct NI due for that year, whether or not any remaining underpayment continues to be collected during 2007/2008.

What if an employer is unable to recover the full amount by the end of the second tax year?

If the employer is unable to recover the full amount by the end of the second tax year, the employer has to bear the cost of the balance himself.

Points for employers to remember:

  • correct any wrong entries on the employee's Deductions Working Sheet (form P11 or equivalent) for Year 1. Advice on how to do this is given in Helpbook E13, Day-to-day payroll
  • ensure that contributions at the correct rate are deducted from any further earnings paid to the employee
  • start to recover from the employee the amount underpaid. Remember that the extra deduction to be made from any further earnings can be no greater than the employee's contribution due on those earnings
  • even if the amount underpaid is not recovered by the end of Year 1, ensure that the contributions actually due for that year are both paid to HMRC and recorded on the employee's P14
  • in Year 2, continue to recover any remaining underpayment from further earnings paid to the employee but do not show any further recovery made in Year 2 on the employee's P14 for Year 2
  • if unable to recover the full amount underpaid by the end of Year 2, the employer has to bear the cost of any amount unrecovered.