Recategorisation of earners

By Tolley in association with Jim Yuill at The Yuill Consultancy
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The following Employment Tax guidance note by Tolley in association with Jim Yuill at The Yuill Consultancy provides comprehensive and up to date tax information covering:

  • Recategorisation of earners
  • Individual employed recategorised as self-employed
  • Individual self-employed recategorised as employed
  • Limitation Act 1980
  • Offsetting

Although it does not happen too often, there can be cases where an individual treated as an employed earner is actually self-employed, but there is a greater number of cases where a self-employed individual is recategorised as an employed earner. In an ideal world the change would take place from a current date and past periods would be ignored. Whilst the ideal outcome is achieved some of the time, there are also cases where HMRC seeks to collect arrears of Class 1 NIC and where employees and employers seek to recover the overpaid primary and secondary NIC. Much will depend on the amounts involved and the administration involved in rectifying matters.

Individual employed recategorised as self-employed

If matters are not simply rectified from a current date, there is a potential conflict in that the employer will want a refund of the Class 1 secondary NIC and the employee will want to offset the primary NIC paid against the Class 2 and 4 contributions that are due.

Assuming the position is not complicated by a benefit such as Jobseekers Allowance, Employment Support Allowance, Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP) or similar benefits having been paid and recovered on the basis of the Class 1 NIC, the position is usually that the Class 1 primary NIC paid is more than enough to meet the Class 2 and 4 due and so leaves the secondary NIC to be fully refunded. The balance of the primary NIC would also be refunded.

The first question to ask is how far back does the incorrect categorisation go? If it is for more than two

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