The hidden costs of ignorance

The hidden costs of ignorance

As the January 31 income tax self-assessment deadline looms, it is all too easy to overlook national insurance. Don't. NI is big. It will net £83bn this year, £6bn more than VAT and second only to the £138bn yield from income tax. And you can easily overpay.

Most at risk are the growing numbers with "portfolio-style" jobs. These include the increasing number who combine employment with self-employment - such as NHS medics with some private patients or the staff journalist with freelance writing or book deals - plus those with more than one job.

But by checking, you can get a refund if you have handed over too much NI. One Guardian reader with a mix of employment and self-employment regained £8,700, including interest, after inadvertently overpaying for five years.

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Unlike income tax where a once-a-year computation looks at your total income from all sources, the NI clock can start afresh for each employment during a week. And employment and self-employment are separate.

"We've found you have to treat NI with care," says tax expert John Whiting at accountants Pricewaterhouse Coopers. "People don't realise you can overpay and may have to claim back. Income tax is well understood, at least by accountants. NI is less well understood. NI operates in a 1950s mindset when portfolio working was unknown. They don't seem to sort out these cases. It's up to individuals or accountants."

Confusingly, there are four classes of NI payment, the first three calculated weekly and the fourth annually. In theory, you could pay all four in a year. And that's not counting the "NI surcharge", which takes 1% of wages above the current upper earnings limit - £630 a week or £32,760 a year.

Class 1 is payable on earnings from employment - 11% of earnings from £94 to £630 a week. But if you have more than one employer, each one could levy class 1 NI up to the maximum.

Class 2 is a flat rate (currently £2.10 a week) levy on the self-employed, including partners.

Class 3 (£7.35 a week) is voluntary. It is paid by a few people who need to keep up contributions for the state basic pension and some other benefits.

Class 4 is 8% of self-employment profits (what you earn less what you pay out in costs) between £4,895 and £32,760 in the current tax year.

You do not pay NI once you reach state retirement pension age - 60 for women and 65 for men. And there is no NI on interest or dividends.

The Inland Revenue will repay excess payments if you ask. You have to know what to ask for and how to do it. The Revenue does not appear to have an automatic mechanism to prevent overpayments. It has never embarked on a publicity campaign to alert those who could fork out too much, and the issue of NI overpayments is difficult to find on its website.

"I frequently find new clients with a mix of earnings come to us with NI overpayment problems that need sorting out," says Mike Warburton at accountants Grant Thornton. "They've paid more than if they had the same earnings level from just one source.

"I believe many are overpaying NI through ignorance. The Revenue does not publicise the overpayment problem. There has been nothing overt as there was with tax credits or reclaiming tax on savings account interest. So if you're not an accountant, you won't know about it."

No matter how many jobs anyone has, the total NI should not top £3,065 in the current tax year (ignoring the 1% extra on earnings over £630 a week). So if you have a combination of earnings sources and end up paying more, you can ask for it back - known as "deferment". The NI helpline is 0845 9157141 or use leaflet CA72 and form CA72A, both available on www.hmrc.gov.uk.

The tax office believes it can sort out overpayments in the first three classes and organise refunds but when class 4 is in the permutation, its systems cannot cope. This is because the first three are on NI system while class 4 is part of the income tax take. Putting the two together "would cost billions but only affect a relatively small number", a Revenue insider suggests.

The Revenue concedes it does not publicise NI overpayments or annual maximum amounts, but a spokesman says: "We aim to collect tax due while minimising burdens on our customers. These aims can sometimes be contradictory. In the circumstances in question we try to strike a balance between cost-efficient collection and customer burdens. But we believe our approach to class 4 refunds is reasonable."

· Need to know more about tax and national insurance? Tony Levene's Paying Less Tax for Dummies 2005-2006 (John Wiley £9.99) tells you all you need to know about self-assessment.

t.levene@guardian.co.uk

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