Class 2 Voluntary Contributions

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Although the self-employed heaved a sigh of relief when the Chancellor reversed his decision to raise the rate of Class 4 NIC recently, other changes in the structure of National Insurance will give cause for concern, particularly for those with low earnings.

The abolition of the self-employed stamp (Class 2 NIC) from April 2018 means those who are currently below the Small Earnings Exemption and have been paying voluntary Class 2 contributions in order to secure contributory benefits will no longer be able to do so.  From that date they will have to pay Class 3 voluntary contributions which is currently £14.10 per week, compared to the Class 2 amount of £2.80 they are currently contributing.  In addition, the special rates for share fishermen (currently £3.45) and volunteer development workers (£5.60) will also be abolished, so they too will have to pay the higher Class 3 amount to maintain their contributions.

The situation is further complicated as in the past those with income below the Class 2 limit had to opt out of paying the stamp by applying for exemption, whereas now low earners have to opt in if they wish to make contributions – a fact many may not have been aware of, and may give rise to gaps in their records.

You can check your Class 2 record by logging onto your personal tax account at HMRC on-line, by post or by phone – details can be found here. If you have gaps in your contributions you can now backdate your Class 2 contributions for up to 6 years but you will need to do so before Class 2 is fully abolished.  You need 35 years of contributions paid or credited to be entitled to the full state pension.

If you would like to discuss your situation with one of the team at Green & Co, please contact us on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Deadline Dates – April 2015

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1 April 2015

  • Payment of corporation tax liabilities for SMEs account period ended 30 June 2014 where payment is not made by instalments.
  • Reduction in main rate of corporation tax to 20%. Small profits rate is abolished except for ring-fence profits.
  • Change to emission thresholds for business cars (zero rate ends).
  • Application to defer Class 2 or 4 NICs for 2014/15 or claim exception for 2015/16.
  • Multiple contractors to advise HMRC that they wish to be treated as a single contractor for 2015/16.

5 April 2015

  • 2014/15 tax year-end.
  • Ensure personal allowances, exemptions and tax bands are efficiently used.
  • Deadline to pay previously unpaid Class 3 NICs for 2008/09.

6 April 2015

  • Start of the 2015/16 tax year. Ensure payroll and other systems are updated.
  • Personal allowances increased to £10,600.

7 April 2015

  • Electronic filing and payment of VAT liability for quarter ended 28 February 2015.

14 April 2015

  • Forms CT61 for quarter ended 31 March 2015.
  • Quarterly CT instalment for large companies (depending on accounting year-end).
  • EC sales list deadline for monthly paper return.

19 April 2015

  • Payment of PAYE/CIS liabilities for month ended 5 April 2015 if not paying electronically.
  • Payment for PAYE liability for quarter ended 5 April 2015 if average monthly liability is less than £1,500.
  • File monthly CIS return.

21 April 2015

  • File online monthly EC sales list.
  • Submit supplementary intrastate declarations for March 2015.

22 April 2015

  • PAYE liabilities should have cleared HMRC’s bank account.

30 April 2015

  • Companies House should have received accounts of private companies with 31 July 2014 year-end and plcs with 31 October 2014 year-end.
  • HMRC should have received Corporation Tax Self A returns for companies with accounting periods ended 30 April 2014.

If you have any questions regarding these deadlines, please contact us.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

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Paying Class 2 NIC Is Changing

www.greenandco.comIn an attempt to simplify the administration of Class 2 NIC, HMRC have announced changes in the way contributions will be paid from 6 April 2015 onwards.

Class 2 NIC (otherwise known as self-employed stamp) is payable by anyone who is self-employed, either as a sole trader or in a partnership. Contributions made count towards certain social security benefits, including pensions, and up until now have been collected separately from income tax, usually by monthly or quarterly direct debit.

In a step on from the announcement last year that arrears of Class 2 would be collected through PAYE codes, HMRC have decided that liability will now be calculated and paid alongside self-assessment tax and Class 4 NIC. As a result, contributions due for 2015/2016 will not become due until 31 January 2017.

The criteria for thresholds and exemptions remains the same, for example, those with small earnings or are of pensionable age are not liable, but everyone will be given the opportunity of making voluntary contributions at the end of the tax year, if they so wish.

From 6 April 2015, the Class 2 NIC rate will rise to £2.80 per week and self-employed individuals should already have received notification of the Revenue’s intention to change how they collect the contributions.

Direct debits and direct billing will cease on 10 July 2015, but more information on the transitional period and how the changes are to be implemented is expected to be released at the start of the new tax year 2015/2016.

For more information contact us.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Photo credit: freedigitalphotos.net

National Insurance – A Class Act

National Insurance was introduced in the UK as long ago as 1911, initially as a contributory fund to provide benefits in the event of incapacity due to sickness or unemployment. Over the years, the scheme has been broadened to include provision of a wide range of social security benefits, and, in particular, as a way of securing a state pension on retirement.

The working population pays contributions according to their employment status, as follows:

CLASS 1 NIC –  IN EMPLOYMENT

Employees pay Class 1 NIC, based on a given percentage (currently 12%) of their wage or salary over the Primary Earnings Threshold (currently £149 per week).  Contributions are deducted automatically from pay, alongside PAYE income tax, although they are not calculated on a cumulative basis as income tax is.  Contributions are also paid on benefits in kind where appropriate.

Employers must also pay a secondary contribution for each employee on earnings over the Primary Threshold (currently 13.8%), and the whole amount is remitted to HMRC through the Employer’s PAYE scheme. Late payments to HMRC are subject to interest and penalties, payable by the Employer, but do not affect the employee’s payment record.

Class 1 contributions are not payable by the employee if:

  • The employee is under 16 years of age.
  • The employee has reached the state pension age.

Contributions count towards eligibility and amounts awarded to each individual employee in respect of State Pension, Jobseeker’s Allowance, Incapacity, Maternity and Bereavement Benefits.

CLASS 2 NIC – SELF-EMPLOYED

Class 2 NIC is a flat rate contribution (currently £2.70 per week) payable by all self-employed individuals, whether trading alone or in a partnership, regardless of size of turnover or level of profits -although it is possible to apply for a Small Earning Exception if profits are below a certain level (currently £5,725). Registration is automatic when informing HMRC of self-employment which is compulsory within 3 months of commencement of trade.

Payment is made usually by monthly direct debit, although it can be made 6 monthly on or before 31 January and 31 July of each year. There is currently no penalty system in force for late payment, but from April 2014 HMRC can opt to collect arrears through an individual’s tax code.

Class 2 NIC is not payable if:

  • The individual is under 16 years of age.
  • The individual has reached the state pension age.
  • The individual is a married woman or widow who is entitled to reduced rate contributions.
  • The individual holds a Certificate of Small Earning Exception.

Contributions count towards Basic State Pension and Maternity Allowance, and eligibility may be affected by late payment, or indeed no payments, because a Certificate of Small Earnings Exception is in force. Contributions do not grant eligibility to Additional State Pension, Incapacity Benefit or Jobseekers Allowance, so it is wise for individuals to consider making their own provision/insurance to cover circumstances in which they would normally wish to claim those benefits.

If self-employment is ceased, HMRC should be advised as soon as possible to avoid receiving demands for unpaid contributions.

CLASS 3 NIC – VOLUNTARY

If an individual has a gap in their contributions, for whatever reason, which might affect their eligibility to State Pension and Bereavement benefits, they can opt to pay voluntary Class 3 NIC  (currently £13.55 per week) to maintain their contribution record.

Class 3 contributions cannot be paid by:

  • Married women or widows who have already chosen to pay reduced NIC during the same tax year.
  • Individuals who have reached State Pension Age during the same year.
  • Individuals who  are entitled to NIC Credits (although there are exceptions to this).

Payment can be made by direct debit monthly or quarterly, but must normally be paid within 6 years of the end of the year in which there is a shortfall in contributions.

Before undertaking to make voluntary contributions, it is important to establish how much actually needs to be paid voluntarily for any given year, and the advantages of doing so. HMRC grants NIC credits to individuals who are unable to work due to illness or caring for someone, so regular contributions do not always have to be made in the normal way to maintain a complete contribution record.

Self-employed individuals are usually better off paying voluntary Class 2 NIC.

More information can be found here: http://www.hmrc.gov.uk/nic/ca5603.pdf

CLASS 4 NIC – SELF-EMPLOYED

These contributions are made by self-employed individuals as a percentage of profits (currently 9%) between the lower and upper thresholds (currently £7,755 to £41,450). A further 2% is payable on profits above the upper threshold.

The liability is calculated alongside Schedule D income tax with which it is included for collection purposes – and is thereby subject to the same deadlines for payment. Likewise, late payments can attract  interest and penalty charges.

Class 4 contributions do not count towards any benefits for the individual, the proceeds being included in the Treasury “pot” to help fund the social security system. In essence, this is another form of income tax.

Class 4 NIC is not payable on profits if:

  • The individual is under 16 years of age.
  • The individual reached the state pension age in the previous tax year.
  • The individual is not normally resident in UK for tax purposes.

Many people will fall under more than one category and so may be paying more than one class of National Insurance in the same tax year.

There are special rules and exceptions for Mariners, EEA Nationals working on UK-flagged vessels and UK nationals working abroad, details of which can be found on HMRC website: http://www.hmrc.gov.uk/ni/index.htm.

 

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Year End Tax Planning

Now that the self-assessment filing deadline is past it is time to turn our thoughts to any tax planning measures which need to be implemented before the end of the fiscal year on 5 April.

Here are a few tips worth consideration:

PENSION CONTRIBUTIONS

If you are an additional rate taxpayer maximising the contributions in 2012-13 will save tax at 50% rather than the 45% scheduled for the next tax year.

GIFT AID DONATIONS

Again if you are liable to tax at 50%  and are considering a significant gift aid donation in the near future ensure that it is made before 5 April to gain maximum relief.

LOSS RELIEF

At present if your business (not Ltd) makes a loss this can be offset against other income received in the year of the loss or the preceding year. From 6 April 2013, however, this relief will reduce to the greater of either £50,000 or 25% of the total income in the year. If you are in a loss position now and are considering buying equipment plant etc it may be advisable to do this before the year end.

DIVIDEND INCOME

If you control your own Company you would be well advised to delay any dividend payments until after 5 April if you are an additional rate payer. The current dividend rate of 42.5% will reduce to 37.5% from 6 April 2013.

CLASS 2 NIC

Self – employed people who had profits of less than £5,595 in 2012/13 can complete form CF10 to clam exemption from payment of Class 2 NIC. It is best to claim this exemption before the start of 2013-14

If you require any further information please contact Green & Co.