Tag: NI

What is Class 2 National Insurance and do Landlords need to pay it?

You make Class 2 National Insurance contributions if you’re self-employed to qualify for benefits like the State Pension.

Most people pay the contributions as part of their Self Assessment tax bill.

You pay Class 2 if your profits are £6,515 or more a year

ClassRate for tax year 2021 to 2022
Class 2£3.05 a week

So for the whole year that’s £158.60

Are you running a business?

You have to pay Class 2 National Insurance if your profits are £6,515 a year or more and what you do counts as running a business, for example if all the following apply:

  • being a landlord is your main job
  • you rent out more than one property
  • you’re buying new properties to rent out

If your profits are under £6,515, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.

You do not pay National Insurance if you’re not running a business – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

As soon as you reach state pension age, you stop paying Class 2 NIC if you carry on working. You only have to pay them on any earnings that were due to be paid to you before you reached state pension age.

In addition Companies who own properties don’t pay national insurance, national insurance is only paid by employees and the self employed.

Class 2 NI would also not apply if you use a letting agent to collect the rents – average fees would be 15%, even if it is a relative or your own company as then your role will only a passive investment role.

The key case on this topic is Rashid v Garcia (Status Inspector) (2002) Sp C 348

Decision released 11 December 2002.

National Insurance – Class 2 contributions – Self-employed earner – Landlord – Taxpayer had income from letting property – Claim for incapacity benefit – class 2 National Insurance contributions paid to qualify for benefit – Revenue took view that property rental activities did not entitle taxpayer to pay class 2 contributions as he was not carrying on business – Benefit refused – Whether taxpayer was self-employed earner carrying on business – Social Security Contributions and Benefits Act 1992, s. 2, 122.

The taxpayer had four properties income £10,942.

It was estimated that the taxpayer spent two to four hours per week on managing the properties and members of his family acting on his behalf spent 16 to 24 hours per week. The Special Commissioner considered this was insufficient activity to constitute a business so no Class 2 NI was due.

Back in 2015 HMRC did try to get Landlords to pay Class 2 as explained in our blog Should Landlords pay Class 2 NI? – Steve J Bicknell Tel 01202 025252

HMRC Examples NIM23800

Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.

Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.

Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.

Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.

steve@bicknells.net

Good news for employers – £3k employers allowance

Fotolia_45741373_XS cash

The NICs Employment Allowance was introduced in April 2014, for the purpose of supporting businesses and charities in helping them to grow by cutting the cost of employment. Eligible employers can claim the allowance, which reduces their Employer NICs bill by up to £2,000 a year. This is an ongoing allowance. Once an employer has claimed the allowance, they will continue to enjoy it in future years, without needing to do anything further. Over a million employers have benefited from the allowance since its introduction.

This measure will increase the Employment Allowance by £1,000 to £3,000 from April 2016. This means eligible business and charities will be able to claim a greater reduction on their employer NICs liability.

This is fantastic news for employers, but there is a potential sting in the tail.

HMRC plan to exclude one person businesses!

But many believe that HMRC’s plan won’t work because all you need to do is employ a family member or friend and then the one person should qualify for the allowance.

John Cullinane, CIOT tax policy director, said: “The government may find its plan to be ineffective in reducing employment allowance claims because it is open to abuse. It will simply have the effect of penalising single director-employee limited companies that are unable to, or do not know that they could, appoint another person as director or employee to claim the allowance.”

http://www.taxation.co.uk/taxation/Articles/2016/01/19/334213/one-person-businesses-may-circumvent-curb-employment-allowance

steve@bicknells.net

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Is this the End of National Insurance?

Pay Packet And Banknotes

You pay National Insurance contributions to qualify for certain benefits including the State Pension.

You pay National Insurance if you’re:

  • 16 or over
  • an employee earning above £155 a week
  • self-employed and making a profit of £5,965 or more a year

The Office of Tax Simplification is currently beginning a process of looking at merging National Insurance with Income Tax.

OTS NI TOR

ACCA’s head of tax Chas Roy-Chowdhury warned that an alignment of NI and income tax rates would be crucial prior to a merger taking place.

Whilst This is Money reported…

Middle and high earners could see their tax bills jump under radical plans to merge income tax and National Insurance, a tax expert has warned.

People taking home £50,000 a year could be £230 worse off, but low earners on £20,000 would save more than £530, and those on £30,000 would come out around £380 ahead, according to snap research by Tilney Bestinvest on the potential tax shake-up.

Chancellor George Osborne wants to reduce ‘complexity’ in the tax system to make it clearer exactly how much people have to cough up, and has ordered the Office of Tax Simplification to see if there is a case for change.

This change is also likely to lead to changes to Pension tax relief reform, Your Money reported…
The government has already announced a consultation on the pension tax relief system, and I believe that a merger of income tax and NI would likely result in the floated idea of a pension with ISA-like tax treatment. This is because at present, a basic rate taxpayer gets 20% tax relief on pension payments but surely this would increase to 32% under a combined system. It seems illogical to increase tax relief at a time when they are actually trying to reduce the cost to the Exchequer. An equal tax treatment of ISAs and pensions could be a prelude to merging the two, potentially drawing ISAs into some form of limetime allowance.
steve@bicknells.net

Abolition of under 21 NI

hübsche brünette studentin

From 6th April 2015 every employer with employees under the age of 21 will no longer be required to pay class 1 secondary NI on earnings below the upper earnings limit (£815 per week).

In line with the change, HMRC are introducing 7 new National Insurance Table Letters to be used from April 2015 to cater for these employees as follows:

Three of the new letters (V, I and K) will be removed in April 2016 in line with the ending of ‘contracted-out’ status in relation to salary-related occupational pension schemes. [Brightpay]

steve@bicknells.net

What if you change a dividend to salary

Stress business woman

Let’s look at the case of Richard and Julie Jones v HMRC [2014] UKFTT 1082 (5 December 2014).

They took a small salary and regular dividends from their recruitment company which was absolutely fine until the company got into financial trouble!

Their accountant (unethically but in an attempt to help their client) suggested they should re-write history and change the dividends to salary so that the liquidator couldn’t recall the dividends.

HMRC then decided to demand PAYE and NI and pursued Richard and Julie personally.

HMRC was refused the right to collect PAYE tax and NI due on the salary, not because the law didn’t allow it, but because it wasn’t possible for Richard & Julie to reclassify the dividends. They had been properly paid and the correct procedure followed. History couldn’t be rewritten and the dividends should have been changed to loans if the dividends were illegal.

steve@bicknells.net

How do you create a Tronc?

Tip jar

Typically, an employee is appointed to administer the tronc and is usually referred to as the troncmaster. HMRC does not prescribe who the troncmaster should be.

Frank owns a pub and restaurant. Tips paid by cheque, debit and credit card are all passed to Sharon, the troncmaster, who has been appointed by Frank. Sharon operates PAYE on the tips that she distributes. A staff committee decides on the allocation and Frank has nothing to do with this.

Even though Frank has appointed Sharon as troncmaster he has played no part, directly or indirectly, in the allocation of the tips because he is not involved in determining who should receive tips and how much each employee should receive. In these circumstances, no NICs will be due on the tips received by the tronc members. Example from NIM02942

Y0u may also find my blog helpful

How Troncmasters can keep your tips NI and VAT Free

The Income Tax (Pay As You Earn) Regulations 2003 require an employer to

  • Notify HMRC of the existence of a tronc created on or after 6 April 2004

And

  • Give the troncmaster’s name (if known)

When you are notified of a tronc you should

  • Confirm that there is an organised arrangement for sharing tips and determine
    • How the tronc receives monies (for example employees paying in cash tips or an employer paying in credit card tips)
    • Who holds the tronc monies and how (for example, is there a tronc bank account and if so who operates it?)
    • On what basis are distributions made from the tronc and who decides that basis
    • Which employees are tronc members
    • Whether the person said to be the troncmaster accepts and understands the role (including the obligation to operate PAYE)

If you are satisfied that there is a tronc for PAYE purposes (bear in mind that a business could have more than one tronc, for example a hotel could have separate troncs for restaurant staff and housekeeping staff and each should be dealt with separately)

  • Arrange for a PAYE scheme to be set up in the name of the troncmaster. Further information can be found in PAYE20160

steve@bicknells.net

Have you paid too much National Insurance?

dreamstimefree_75244

Unlike Income Tax which is cumulative and assessed across all earnings, National Insurance starts from zero on each individual employment and you also pay National Insurance on Self Employed earnings.

So if you are a Director of multiple businesses paid as an employee its easy to see how you could over pay and you might not even realise because National Insurance is not shown on your Self Assessment Return.

You can also over pay National Insurance if you are a part time employee with multiple employers and irratic earnings, this because National Insurance is calculated on a weekly/monthly basis, not a cumulative basis and its by employer.

What you need to do

Write to HM Revenue and Customs confirming:

  • your National Insurance number
  • why you’ve overpaid
  • the tax year(s) you’ve overpaid

You should include your P60 or a statement from your employer showing the tax and National Insurance for each year you’re claiming for.

You should apply within 6 years of the tax year you’re claiming for.

HM Revenue and Customs
Payment Reconciliation
National Insurance Contributions Office
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

steve@bicknells.net

 

 

Do you think National Insurance should be merged with Income Tax? it could happen soon

Pay Packet And Banknotes

The Tax Payer’s Alliance have been  campaigning and it looks like the Chancellor, George Osborne, has agreed that the first step is to re-name National Insurance as “Earnings Tax”. The change is to be proposed in legislation this week.

This story was reported in the Telegraph on 23rd February. There is also an interesting article on Tax Research UK (Richard Murphy).

You pay National Insurance contributions to build up your entitlement to certain state benefits, including the State Pension.

You pay National Insurance if you’re:

  • 16 or over
  • an employee earning above £149 a week
  • self employed and making a profit over £7,755 a year (Class 4) plus £2.70 per week Class 2 NI (you may not have to pay any Class 2 NI if your profits are below £5,725)

If you’re employed, you stop paying Class 1 National Insurance when you reach the State Pension age.

If you’re self-employed you stop paying:

  • Class 2 National Insurance when you reach State Pension age (or up to 4 months after this to pay off any contributions you owe)
  • Class 4 National Insurance from the start of the tax year after the one in which you reach State Pension age

Income Tax is whole different ball game. Whilst I can see its simpler to have one tax the changes that would be required to achieve it would be huge!

Is it worthwhile?

steve@bicknells.net

 

 

 

From April what could I take in wages and still be below the thresholds?

Pay

On the 6th April 2014 the personal allowance will increase to £10,000 (up £560) which means you can earn £10,000 before you pay income tax.

But you might want to keep your earnings below the NI Threshold, in previous years the employers and employee’s NI thresholds have been out of alignment but from 6th April 2014 they will be aligned, which means that earnings over £153 per week (£7,956 per year) will attract both 12% employees’ NI and 13.8% employers’ NI. For earnings above £805 per week (£41,865 per year), the employees’ NI rate drops to 2% but the employers’ NI rate remains unchanged.

So to avoid Income Tax and NI you would need to earn below £7,956.

But, there is some good news, from April 2014 there is a new ’employment allowance’ of £2,000 which you can offset against your employers NI.

steve@bicknells.net

P11D – should the employee pay NI on Private School Fees

Schoolchild writting on blackboard.

As with so many tax issues, the paperwork will determine the answer.

Let’s assume your childs school fees are £10,000 a year that means you will need to earn £17,241 per year (based on paying 40% tax and 2% NI) over 10 years that’s £172,414 per child, that’s a lot of fees.

So its no surprise that some parents ask their employer to pay the bill and try to save the employees NI but this can go badly wrong as demonstrated in Ableway Ltd v IRC SpC 294….

Mr W and his wife B were directors and major shareholders of Ableway Ltd. The company’s registered office was the home address of W and B. They arranged for the company to pay their two sons’ school fees, although in an undated letter, they undertook to pay the fees in the event of the company failing to do so.

The Revenue argued that the liability belonged to W and B, and that they had accepted this liability by signing the school entry form. Furthermore, the discharge by an employer of an employee’s pecuniary liability was earnings. The school bursar also confirmed that the parents were liable to pay the fees. He said that the invoice was sent to the person responsible for the fees, but that the parents remained liable to pay them. In the event that the school ever had to take action to recover payment of fees, it would sue the parents, relying on the signed entry form and signed deposit form.

HMRC have guidance on the following situations:

Basically if the company contracts directly with the school and the school confirms in writing that the company is responsible for all fees in all circumstances then the employee will not have to pay employees NI.

This is explained clearly by Indicator – Paying for Education

This saves the employee the 2% NI in our earlier example.

Another idea from Indicator is to have the benefit against the spouse with the lowest tax rate.

steve@bicknells.net