Partnership National Insurance

lmiddleham

Hi

My girlfriend is thinking of becoming self employed but I was thinking it may be better to go into partnership for tax reasons.

Can I just check I've got the following correct:

Class 2 NIs: If the total taxable profit (not our share) is over the lower limit we would both have to pay class 2 NI. As a partnership this would lead to both of us having to pay NI here rather than just one of us as a sole trader.

Class 4 NI: For example if the total taxable profit is £1,000 above the lower limit but we split the taxable profit 50/50 this would put our personal share of the taxable profit below the lower limit. Therefore neithe of us would have to pay NI.

Apart from tax implications are there any other advantages/disadvantages I should be aware of?
We'd both be employed fulltime as well as doing this so we'd both have to pay tax on our share of taxable profit. Again a partnership may be worthwhile to make sure we both use up all of our basic rate allowance before paying higher rate tax.

Thanks for your help.

Scalloway

Joint & Several Liability

An insolvency expert once told me that you should take far more care in picking a business partner than a marriage partner! Remember that as a partner you have joint and several liability for all partnership debts, so should your girlfriend do a runner you will be left with all the partnership liabilities.

Anne Boleyn

National Insurance

Hi Imiddleham

Class 2 NI is payable by self employed persons regardless of the level of profit or loss. Currently £2.40 a week.

However as you are both in full-time employment and paying class 1 NI you shouldn't have to also pay class 2. This would need to be taken up with HMRC.

Class 4 NI is payable at 8% on your profits after your personal allowance.


I echo the previous advice and would also stress the importance of a partnership agreement signed by you both.

jilt

You can claim deferment of payment of class 2 and class 4 NI if your employment earning are over a specified amount (2010-2011 £43875)

You can also apply for exemption of class 2 if your self-employed earning are expected to be less than a specified amount (£5075 for 2010-2011)

So it just depends how much each partner earns to which clasess of NI they'd have to pay

lmiddleham

Just to clarify on this point from Jilt:

You can also apply for exemption of class 2 if your self-employed earning are expected to be less than a specified amount (£5075 for 2010-2011)

The earnings are likely to be under this threshold from self employed earnings but we are both in full time employment.

Am I correct in thinking she can still apply for exemption from class 2 NI?

Also, the self employed earnings are likely to be below the threshold for class 4 NI. Does she still get the exemption despite being in full time employment?

Anne Boleyn

National insurance

Hi

Class 2 & 4 contributions only apply to your self employed earnings. If your taxable profits are under the limit then there won't be any class 4 NI to pay.

lmiddleham

Great

That's how it sounded but I thought I'd check as (correct me I'f I'm wrong) Income Tax works differently. Your employed earnings and self employed earnings are all lumped together.

So regardless of how little it earns, as she's a basic rate taxpayer, all business profits will be taxed at 20%, and later the higher rate.