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National insurance payable on commission based employees

Unlike income tax under PAYE, Class 1 National Insurance Contributions (NICs) are not normally calculated on an employee’s cumulative earnings but on the earnings for that week or month in isolation. Employees pay Class 1 contributions at the rate of 12% on earnings between £663 a month and £3,488 a month. Above the upper earnings limit, a rate of 2% applies.

There have always been special rules for directors where an annual earnings period applies, but these do not generally apply to employees.

HMRC are understood to be increasing the application of an annual earnings period for other employees in cases where they suspect Class 1 NIC is being avoided.

Take for example a car salesman with a regular salary of £24,000 a year. His normal gross pay would be £2,000 a month, but he receives a commission twice a year based on car sales.

If he receives £5,000 commission in October due to his car sales in the period to September, £3,512 of that commission would only attract 2% Class I NICs (£70.24), as the £3,488 limit applies on a non-cumulative basis.

Applying an annual basis would have resulted in a further £351.20 being deducted (£421.44 less £70.24).

Note that employers NIC would be unaffected.

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