National Insurance

JodieR

Morning
A client of mine is employed, earning approx £43k plus company car & medical benefit. He's now started running his own small business in the evenings as well and needs to register as self employed. Earnings from the business are unlikely to exceed £5k in 08/09, but may do in 09/10 and I've just been looking into whether he needs to be paying class 2 (and/or class 4) NI. It used to be pretty simple to work out (back in 2002 when I did my ATT exams!), but I've read the blurb in Tolleys about it and it seems to be quite a calculation now. Does anyone have a 'step-by-step' way to work it out or any other advice for me?
Ta

Dean

Oooooooh the 'annual maximum calculation'! What a beast that is!!

Have you seen the step by step guide in the legislation?

I'll try and dig it out for you...

Regards

Dean

jilbo

Jodie,

He's needs to apply for exemption of class 2 and class 4 NI because of his high salary. Forgot what the form is but will check tonight and let you know. If you earn over something like £36k you get the exemption.

JodieR

Thanks The form was mentioned in Tolleys (CA72B if anyone's interested) and it seems straightforward as he only has one employment which is over the higher earnings limit, so it looks like he'll just pay 1% class 4 NI for any self employment earnings over the lower profit limit.
But Dean, if you can find the calculation I'd like to see it, just to make sure.
Thanks

groundy

Have you thought about setting this client up as a limited company with maybe some shares to the wife?

JodieR

yes, we've discussed it but he's going to wait and see if it takes off first - there may even be a small loss in 08/09 so I'm not being too hasty about it.

Dean

Hi Jodie

Here’s some info on the annual maxima:

Annual Maxima

There is an “annual maxima” of contributions applying to any individual for a “contribution year”. The contribution year is the same as the tax year. These “annual maxima” rules apply where the earner either has two jobs (and is therefore paying Class 1 NICs twice) or he is both employed and self employed.

Employees pay Class 1 NIC and the self-employed pay Classes 2 and 4. If an individual has substantial earnings and profits as both an employee and as a self employed individual, this could add up to a sizeable amount of NIC each year. Therefore there is a maximum cap which applies each year.

There are 2 tests. “Test 1” compares Classes 1 and 2 and allows us to reclaim any excess of Class 2 (and then if appropriate any of the Class 1). “Test 2” may allow a refund of the Class 4 contributions.

The annual maxima rules are complex and difficult to remember. It is therefore important that you are familiar with where to locate these rules in the tax statutes. The annual maxima rules are contained in Statutory Instrument 2001/1004.

Now to the calculation!! You asked for it! :001_smile: (based on 2006/07)



Test 2 - SI 2001/1004 Reg 100

This second test applies when a taxpayer is both employed and self-employed and is therefore paying NICs under Classes 1, 2 & 4. The second annual maxima test may result in a refund of Class 4 contributions only.

The annual maxima computation here is extremely complex. Once again, a stepby-step approach is laid down in SI 2001/1004 at paragraph 100.

Step 1: £(Upper profit limit – lower profit limit)...........................................X

Step 2: Multiply the result of Step 1 by 8%...............................................X

Step 3: Figure found by Step 2..............................................................X
Add: 53 x Class 2 NICs..........................................................................X
.......................................................................................................X

........................................................................................................£
Step 4: Result from Step 3......................................................................X
Less: Class 1 primary NICs paid at 11%.....................................................(X)
Less: Class 2 NICs paid..........................................................................(X)
.........................................................................................................X

Once we have arrived at the Step 4 figure above, there are three possible outcomes.

Case 1: If Step 4 is a positive figure, we must compare it with the result of the following test:
........................................................................................................£
Class 1 NICs paid at 11%........................................................................X
Class 2 NICs paid...................................................................................X
Class 4 NICs paid at 8%.........................................................................X
“Comparative total"...............................................................................X

If Step 4 exceeds the comparative total , then Step 4 is the maximum Class 4 NICs payable for the year. Any excess Class 4 contributions will be refunded.

Case 2: If Step 4 is a positive figure and is less than the comparative total, then Step 4 is the maximum Class 4 NICs payable for the year at the 8% rate. An additional 1% will be payable using the rules we shall look at below.

Case 3: If Step 4 is a negative figure, the Class 4 NICs payable at 8% for the year will be NIL. It is however possible for the 1% rate to apply (see below).

Steps 5 to 9 need only be taken if Cases 2 or 3 apply.

Step 5: Step 4 x 100/8............................................................................X

Step 6:.................................................................................................£
Lower of: Actual profits or upper profit limit.................................................X
Less: lower profit limit..........................................................................(5,035)
..........................................................................................................X

Step 7: Figure at Step 6..........................................................................X
Less: figure at Step 5............................................................................(X)
.........................................................................................................X
If this is a negative figure, it can be assumed to be NIL

Step 8: Step 7 x 1%...........................................................................X

Step 9: £(Actual profits – upper profit limit) x 1%......................................X

The maximum Class 4 NIC payable is:

Figure found by Step 4............................................................................X
Figure found by Step 8............................................................................X
Figure found by Step 9............................................................................X
ANNUAL MAXIMUM..................................................................................X
Less: Class 4 NIC actually paid.................................................................(X)
Class 4 refund due.................................................................................(X)

Regards

Dean

Dean

Doh! It looked ok when I was preparing it! If anyone knows how to align it properly then please let me know?

Regards

Dean

burg

Its a pain the alignment thing, the best i've ever come up with is putting full stops in:-

Income...........X
C of S............(x)
Gross Profit.....X


But as you can see that is not great!

Dean

Haha. Not ideal but getting there. Thanks!

Regards

Dean

JodieR

how horrible! Thanks though - I'll let you know how I get on with it.
do you think NI is exempt from the 'tax doesn't have to be taxing' thing?