Tag Archive for 'self employed'

Sleeping Partners and NI Contributions

Published on May 15, 2013 in National Insurance. 0 Comments Tags: , , , , , , .

In the past sleeping partners and inactive partners didn’t have to pay NI contributions on their partnership profits.  However, HMRC changed its view on this in April 2013 and it now considers that all partners are liable to pay NICs in respect of their taxable profits, whatever their level of activity within the business. The implications for inactive and sleeping partners are:

  • if not already registered as self-employed, the person must register with HMRC and arrange to pay class 2 NICs from 6 April 2013;
  • exemption from paying class 2 NICs can be claimed if the taxable profits are low, or the individual has another employment; and
  • class 4 NICs will be due on their profits from 2013/14 onwards and will collected through the normal self-assessment for 2013/14.

This article was compiled by Ashley Barrowclough, Partner at Balance Accountants.

Universal Credit

Published on October 10, 2012 in Employee/Employer Issues. 0 Comments Tags: , , , .

Universal Credits is the flagship of the Welfare reform bill discussed in November 2010 – it is payable to individuals on low incomes and is designed to top up their earnings.  It will be rolled out in four areas next April – Tameside, Oldham, Wigan and Warrington – with the remainder of the country going live in October 2013.

The Universal Credit will be accessible through the Government Gateway website and all claims will be managed online with payments for one month being made on the basis of the earnings from the previous month – and for the employed this process does appear to be in line with the Governments objectives of making the system simpler.  Salaries will be recorded monthly through the PAYE scheme and HMRC will pass on the information to the individuals’ Universal Credit accounts.  In turn the individual will retain more of their earnings rather than have a deduction for tax.

But what about the self-employed? – the new start up businesses who want to take themselves out of unemployment, or potentially the entrepreneur who has a business idea he or she wishes to persue?  These individuals will have little or no earnings in the first few months or possibly a year.  It is likely that they will initially set up as a self employed soletrader with no salary/earnings and they will have no employer to pass on the Universal Credit payment to which they are due.

As the workings of the Universal Credit are finalised it is becoming clear that the lower earning self-employed worker will have more administrative burdens placed upon them.  The self-employed worker with need to report their monthly income from self-employment  to the Department of Work and Pensions (DWP) but will need to be in a different format to that required by HMRC’s new cash accounting basis, introduced in the last budget.  It will also need to be in a different format to that used for producing official accounts.  A third set of information will be required and there will be a window of only seven days to provide the information or the payments will stop.

There is also the uncertainty for workers who do not know if their earnings are reported through the system by those they do work for.  This would result in the potential loss of much needed support during the period of uncertainty.

It has been suggested that small businesses, where the family currently obtain Tax Credits, and new start up businesses may want to consider incorporating their businesses in order to have a salary paid on a monthly basis.  The salary can be operated through the PAYE system, removing the necessity to undertake the burden of monthly accounting to the DWP via HMRC.  Broadly, the overall administrative burden is less when a limited company is used and it may be worthwhile to review this option before the Universal Credit commences.  However, the additional costs incurred in incorporating a business and producing full accounts at a time when businesses are trying to keep overheads to a minimum, may outweigh these benefits.

It is also worthwhile having a transition plan in place if you have a Tax Credits overpayment which is being repaid to HMRC on a monthly basis.

We will be keeping an eye on how options develop for the self-employed, and will inform people accordingly.

This article was taken from our Pay Less Tax brochure Summer 2012.

National Insurance Contributions for the Self Employed

Published on July 7, 2011 in National Insurance. 0 Comments Tags: , , , .

When taking steps to becoming self employed people often take time to consider the tax bill they will have after each year of trading but can often overlook the cost of national insurance contributions. 

When registering a new business with H M Revenue and Customs information about Class 2 National is readily available, but people can be unaware that, when self employed, there is also Class 4 national insurance to pay.

This guide sets out to explain how these 2 classes of national insurance are applied to you.

Will you end up paying more in NIC than you bargained for?

Class 2 National Insurance Contributions

If you’re self-employed you normally have to pay Class 2 National Insurance contributions.  When you start a new business you have three months in which to register your new business with H M Revenue and Customs.  Once HMRC know your details you will be sent details on how much to pay and when.

You pay Class 2 National Insurance contributions at a flat rate, currently £2.50 a week.  You can choose to make your payments either monthly or 6 monthly by direct debit.  From April 2011 your Class 2 National Insurance contributions payments will become due on 31 January and 31 July, the same dates as the Self-Assessment tax bill.

Class 2 National Insurance Contributions and State Benefits

Class 2 contributions count towards certain benefits, like the basic State Pension, Maternity Allowance and Bereavement Benefit.  But any claims for benefits may be affected if your payments are late.

Class 2 contributions do not normally count towards the additional State Pension, Statutory Sick Pay or Jobseeker’s Allowance, so you might want to think about making other arrangements like a personal pension and income protection insurance.

Class 2 National Insurance credits if you could not work 

You don’t have to pay Class 2 National Insurance contributions for any complete week when you can’t work due to illness or you are caring for someone and are receiving certain benefits, but you may be able to get National Insurance credits instead.  Credits can help maintain your National Insurance record and so protect your entitlement to the basic State Pension and certain other state benefits.

Exceptions to paying Class 2 National Insurance Contributions

You don’t have to pay Class 2 National Insurance contributions if any of the following apply:

  • you are under 16
  • you have reached State Pension age
  • you’re a married woman or widow who is entitled to pay reduced contributions
  • your earnings are below a certain level – see ‘If you have low earnings’ below
  • for complete weeks when you could not work if certain conditions are met

If you have low earnings

If you anticipate that your net profit from your self-employment business is likely to be less than £5,315 per year you can apply for a Certificate of Small Earnings Exception and not pay Class 2 National Insurance contributions. Once issued this Certificate of Small Earnings Exception will cover a period of several years.  Once the period expires you will need to apply for a new Certificate.  However, if during the period covered by a certificate, your earnings rise above £5,315, HMRC must be notified and Class 2 contributions become due.

If you do have low earnings you might decide to carry on paying Class 2  voluntarily to keep your entitlement to the State Pension and other benefits.  However, if you are also in employment whilst trying to get a young business off the ground, it is likely that you will be paying national insurance on a salary, in which case, your entitlement will not be affected and so voluntary payments will not be required.

If you want to apply for a Certificate of Small Earnings Exception you will need to complete form CF10 (easily found online if you Google “HMRC CF10”.

Class 4 National Insurance Contributions

If you are self-emplyed and your annual profits are over a certain amount you normally have to pay Class 4 National Insurance contributions in addition to Class 2 contributions.  This guide explains how much you pay and the circumstances when you may be exempt from paying.

The amount of Class 4 National Insurance contributions you have to pay for any tax year is based on your profits for that year. You pay 9 per cent on annual profits between £7,225 and £42,475 (2011-12) and 2 per cent on any profit over that amount.

You work out your Class 4 National Insurance contributions on your Self Assessment tax return and pay them alongside your Income Tax.  Class 4 National Insurance contributions don’t count towards benefit entitlements.

If you have more than one business, special rules apply for calculating adjustments to profits on which you pay Class 4 National Insurance contributions.

If you file your return online, your Class 4 National Insurance contributions will be worked out for you automatically. If you send in a paper tax return by 31 October following the end of the tax year and leave the space blank, HMRC will work out your contributions. You can work out your Class 4 contributions yourself by using the Class 4 calculator in the notes that come with your tax return supplement.  Perhaps obviously, we at Balance Accountants, strongly recommend that you appoint a reputable accountant to look after this for you.

Exceptions to paying Class 4 National Insurance contributions

You don’t have to pay Class 4 National Insurance contributions if any of the following apply:

  • you are under 16
  • you are still working in the tax year after you reached State Pension age
  • you are not resident in the UK for tax purposes

If you are under 16 you’ll have to apply for an exemption by filling in form CA2835U. You can get the form by writing to:

HM Revenue & Customs
Deferment Services
National Insurance Contributions Office
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

This article was prepared by Deborah Bradley on behalf of the Balance Team.  If you have any comments please leave them below.