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National Insurance

Potts & Co - Accountancy & Business Advice

Check Your State Pension Forecast

By | National Insurance, Pensions, Potts & Co Accountancy & Business Advice News

Do you know how much state pension you will receive when you retire? You can find this figure though your online personal tax account; click on ‘view state pension forecast’.

People who reach state retirement age after 5 April 2016 need 35 full years of national insurance contributions (NIC) to qualify for the full state pension. Your personal tax account also shows any gaps in your NIC record.

An incomplete NIC year will be recorded for periods in which you were contracted out of the state pension. If you are still under state pension age (which is gradually increasing to 68) you can continue to pay NIC or collect NIC credits to boost the amount of your state pension.

Self-employed individuals need to pay class 2 NIC of £153.40 for 2018-19 to achieve a full NIC year. If you are employed you can accrue a full year of NIC for free by earning between £6,032 and £8,424 for 2018- 19. If you are neither employed nor self-employed you can pay class 3 NIC on a voluntary basis at £14.65 per week. Class 3 NIC can also be used to fill gaps in your NIC record for the last six years.

Potts & Co - Accountancy & Business Advice

Last Chance To Pay Class 2 NIC

By | HMRC, National Insurance, Potts & Co Accountancy & Business Advice News

The two classes of national insurance (NIC) payable by the self-employed will be merged into one class from 6 April 2019. The flat rate Class 2 NIC will disappear and all NIC will be payable based on the profits made in the year.

However, it is currently Class 2, payable at only £2.95 per week, which provides an entitlement to the state pension and other benefits. If your self-employed profits are below the small earnings threshold (£6,205 for 2018-19), you are not required to pay any NIC, but you may choose to pay Class 2 NIC voluntarily to maintain your contribution record for state benefits.

Paying Class 2 NIC is beneficial if you don’t currently have 35 full years of contributions, which are needed to receive the full state retirement pension. You can pay Class 3 NIC voluntarily, but that costs £14.65 per week instead of £2.95. Paying Class 2 rather than Class 3 NIC would thus save you £608.40 for 2018-19.

Similar savings may be made for up to six earlier tax years in which you have gaps in your contribution record, if you did make a small amount of self-employed profits in the year.

Potts & Co - Accountancy & Business Advice

NIC For The Self-Employed

By | HMRC, National Insurance, Potts & Co Accountancy & Business Advice News

For reasons lost in the mists of time, self-employed individuals pay two types of national insurance contributions (NIC): Class 2 and Class 4.

Class 2 is charged at £148.20 per year (for 2017-18), and is only payable if your annual profits are £6,025 or more. Class 4 NIC is calculated as 9% of your profits up to £45,000, plus 2% of profits above that threshold, but you pay it only if your annual profits are £8,164 or more.
Class 2 NIC provides a year’s credit towards the state pension and entitlement to certain other state benefits; Class 4 NIC provides you with no credits or entitlements at all.

The Government had planned to combine Classes 2 and 4 NIC from 6 April 2018 and to attach the entitlement rights to the combined NIC charge. This would simplify NIC for self-employed people. However, those with very small profits would no longer be able to pay the low level of Class 2 NIC on a voluntary basis to secure state benefit entitlements for a year.

The Government has now decided to postpone the NIC merger until 6 April 2019. This means that you will carry on paying Class 2 and Class 4 NIC for 2018-19 through your self-assessment tax bill as now.

Potts & Co - Accountancy & Business Advice

National insurance changes

By | Budget Update, National Insurance, Potts & Co Accountancy & Business Advice News

The headlines following the Budget were dominated by the proposed 2% rise in the main rate of Class 4 national insurance (NIC) which is paid by the self-employed. This appeared to break a Conservative Party manifesto pledge not to raise the rate of income tax, national insurance or VAT in this Parliament, ie before May 2020.

On 15 March Chancellor Hammond announced a U-turn: there won’t now be an increase in Class 4 NIC in 2018 or in 2019. This will leave an unexpected gap in the finances which must be filled.

Stand by for some additional tax changes to be announced in the second 2017 Budget to be held in the Autumn. Class 2 NIC, which is also paid by the self-employed, will be abolished from 6 April 2018, as was announced in the 2016 Budget. Class 2 NIC is levied at a flat rate: £148.20 per year for 2017-18, when profits exceed £6,025.

Class 2 NIC can be paid on a voluntary basis by self-employed people with small profits, in order to build up an entitlement to the state pension. From 6 April 2018, any voluntary NIC paid to protect state benefit rights will have to be paid as Class 3 NIC, which will cost at least £741 per year (2017-18 rates).

Individuals who attained state pension age before 6 April 2016 can pay voluntary Class 3A NIC to boost their state pension by up to £25 per week. The amount payable depends on the taxpayer’s age at the time of the payment. If you want to top-up your state pension, you must make the Class 3A NIC payment before 6 April 2017.

Potts & Co - Accountancy & Business Advice

Marginal tax hit for Scots

By | National Insurance, Personal Tax, Potts & Co Accountancy & Business Advice News

The Scottish Parliament has proposed that the threshold for 40% tax will be held at £43,000 for 2017-18. In the rest of the UK, this 40% threshold will increase to £45,000 as shown in the table below.

2017-18 Scotland Rest of UK
Personal allowance tax free 11,500 11,500
20% tax on next 31,500 33,500
40% tax applies from £43,000 £45,000
Class 1 NIC at 12% up to £45,000 £45,000
Class 4 NIC at 9% up to £45,000 £45,000

The power to alter national insurance contributions has not been devolved to Scotland, so the Class 1 and Class 4 NIC thresholds won’t align with the 40% income tax threshold for Scottish taxpayers in 2017-18. This will create a 52% marginal rate (40% tax + 12% NIC) for Scottish taxpayers on employment income between £43,000 and £45,000.

The Scottish income tax bands do not apply for capital gains, savings income or dividend income. This means that Scottish taxpayers will have to perform two separate tax computations to work out their entitlement to the savings allowance, the correct dividend tax rate or the capital gains tax rate. In practice, those calculations should be performed by tax software.

As an employer, you need to follow HMRC’s instructions to apply tax codes. The PAYE codes for Scottish taxpayers should include a prefix ‘S’. Check that your tax software is using the correct tax bands for 2017-18 if your payroll includes Scottish taxpayers.

Potts & Co - Accountancy & Business Advice

Long-term implications of child benefit

By | Child Benefit, National Insurance, Potts & Co Accountancy & Business Advice News

Child benefit is paid to parents of young children in the UK, if they claim it. Some higher earning parents don’t claim the benefit, as they know it will be clawed-back as a tax charge. However, not claiming child benefit can disadvantage both the parent and the child in the long term.

Claiming child benefit, whether it is actually paid or not, ensures the parent receives national insurance (NI) credits for periods when they aren’t working or claiming job seekers allowance, whilst the child is under twelve.

To receive the full state pension, the parent needs to have paid NI, or receive NI credits, for 35 tax years. The NI credits from child benefit help plug the gap in the NI record which may be created when one of the parents stays at home to care for the child. Both parents need to build up a complete NI record, as the new flat-rate state pension is not paid based on a spouse’s NI contributions.

The claim also creates a dormant NI record for the child: at the age of fifteen years and nine months, they are allocated an NI number. Where child benefit hasn’t been claimed, the individual needs to apply for an NI number before they can work, open an ISA or receive a student loan.

To avoid these difficulties, the child benefit should be claimed as soon as possible after the child’s birth. Where the parent expects that the benefit will be clawed-back as a tax charge, they should tick a box on the claim form to receive a nil payment. They can reverse this at any time; however, a benefit claim can only be backdated for up to three months.

Potts & Co - Accountancy & Business Advice

Topping-Up Your State Pension

By | National Insurance, Pensions, Potts & Co Accountancy & Business Advice News

To receive the full amount of the new state pension you need to pay national insurance contributions (NIC) for 35 complete tax years.

If you were contracted out of the second state pension, or SERPS, for any part for your working life you may receive less pension than you were expecting.

You can check how much state pension you are due to receive on gov.uk under ‘check state pension’ or through your personal digital tax account. We can help you with this.
Where you have missed paying NIC, those contributions can often be replaced using voluntary NIC payments; Class 3 NIC for employees or Class 2 NIC for the self-employed. This top-up facility is particularly useful for those who have retired before state pension age or have missed making contributions because they lived overseas.

Spouses and civil partners of members of the armed forces, who accompanied their partners when posted overseas, can apply for NI credits toward their state pension for tax years back to 1975-76.

If you reached pension age before 6 April 2016 you can also top-up your state pension by up to £25 per week, by making lump sum payment before 6 April 2017. The amount due will depend on your age at the time you make the payment. This is a useful way of increasing the income of women who have a small state pension because they spent some years out of the workforce.

Potts & Co - Accountancy & Business Advice

Employment Allowance For One-Person Companies

By | National Insurance, Potts & Co Accountancy & Business Advice News

More good news for small businesses: the employment allowance has been increased to £3,000 per year. This allowance can be set against the employer’s Class 1 NIC payable on employees’ and directors’ pay.

The bad news is that the employment allowance is no longer available to companies where the only employee in the year is a director of that company. To break this ‘one employee’ condition you may decide to employ a family member for a few hours.

The second employee doesn’t have to be a director of the company. However, the HMRC guidance for one-person companies specifies that the second employee must be paid above the NIC secondary threshold (£156 per week for 2016-17).

However, the regulations don’t mention a minimum employment period or a minimum level of income. HMRC have read far more into the regulations than is in the law and as a result they’re imposing conditions by guidance rather than by regulation.

If your company wants to continue to qualify for the employment allowance in 2016-17 the only requirement it has to meet is that it has two or more paid earners for at least one period in the tax year (which may as short as a week).

Potts & Co - Accountancy & Business Advice

P11D Or No P11D – Reporting

By | National Insurance, Potts & Co Accountancy & Business Advice News

Employee benefits and expenses need to be reported for the 2015-16 tax year on forms P11D or P9D, by 6 July 2016. A P11D(b) must be submitted to report the Class 1A NIC due on the benefits provided.

If there is no Class 1A NIC to pay and you have received a form P11D(b), you should return that form completed as ‘nil’. You can also tell HMRC no P11Ds are due using a structured online email form or we can do this for you. Alternatively, you make the ‘no P11Ds’ declaration using the HMRC PAYE online service.

If you use the free Basic PAYE tools software you will have to use one of the above methods to inform HMRC as there the box that said ‘no P11Ds due’ has been removed.

Where Class 1A NIC is due it must be paid by 22 July 2016, or by 19 July if you pay by cheque. When making an electronic payment for Class 1A NIC the 13 character accounts office reference should be used with ‘1613’ tagged on the end. The ’13’ tells HMRC that this is a payment for Class 1A NIC.