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.”
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.
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
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.
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]
Let’s look at the case of Richard and Julie Jones v HMRC  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.
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
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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
- 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
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
National Insurance Contributions Office
Benton Park View
Newcastle upon Tyne
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?
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.
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.
If your employees receive tips directly from your customers and are allowed to keep them, then you do not need to do anything for PAYE tax or NICs. There are no NICs due on the money, and the tax due is the employee’s responsibility. Your employees should declare the money to HMRC, who will usually adjust their tax code to collect any tax due.
A tronc is an arrangement for pooling and distributing tips and service charges and the person who operates the tronc is known as a troncmaster. If your employees use a tronc you must tell HMRC who the troncmaster is so that they can set up a PAYE scheme for the tronc.
Tips are outside the scope of VAT when genuinely freely given. This is so regardless of whether:
• the customer requires the amount to be included on the bill
• payment is made by cheque or credit/debit card
• or not the amount is passed to employees.
Restaurant service charges are part of the consideration for the underlying supply of the meals if customers are required to pay them and are therefore
If customers have a genuine option as to whether to pay the service charges, it is accepted that they are not consideration (even if the amounts appear on the invoice) and therefore fall outside the scope of VAT.
Further information is available from: Notices 700 The VAT guide and 709/1 Catering and takeaway food