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TaxationWeb by Decision FinanceDecision Finance provide a brief introduction to Class 2 and Class 4 National Insurance contributions for the self-employed.
IntroductionIf you are self-employed, you are obliged to assess your own tax, including National Insurance Contributions. You must pay Class 2 NIC (National Insurance Contributions), if you earn above an amount determined each year. Remember, if you fail to pay your NIC you may be liable to prosecution. All examples given in this guide are for the tax period 05-06.
What do you need to know about it?How do I know if I am self-employed?
Technically, you are self-employed for the purposes of NIC if you are gainfully employed in Great Britain, other than in employed earner's employment. Put simply, some indicators are:
• Working when and where you please;
• Doing the work you wish to do;
• Not working when you wish;
• Earning your own money when you wish;
• Being able to make your own decisions; and
• Being responsible for any losses you make.
Special exemptions apply to women who have been widowed or are currently married. This exemption does not apply if you have been divorced or have never been married, and is limited to those who had reduced liability in 1978. Those who were exempt then will only lose that status in limited circumstances (such as divorce) now. Professional advice is recommended.
If you are of pensionable age you will not have to pay Class 2 NIC. Pensionable age is currently 65 for men and 60 for women.
You will not have to pay NIC if you are sick, and even if you are not eligible for benefits you will be exempt for the period of time during which you are unable to work. It is important to note that this exemption will only apply to you if you are sick for a whole week (this includes Saturdays and Sundays, not just working days).
Class 2 & Class 4 NICIf you are self-employed you must pay Class 2 NIC to HM Revenue & Customs. The payment is set at a flat rate each year. If you earn above the set amount you will be liable to pay Class 4 NIC, which is linked to the amount you earn. If your earnings put you in the Class 4 NIC bracket you will have to do a self-assessment. The appropriate forms are available from your local tax office, or online from HM Revenue & Customs.
For the year 05-06, the weekly flat rate NIC2 figure is £2.10. For the year 04-05, the figure was £2.05 per week.
You may be able to get credits when you are unable to pay Class 2 NIC. Credits maintain your entitlement to benefits when you are unable to pay, and count towards basic benefits. For example, you are entitled to credits if you are:
• Sick for a whole week;
• Taking maternity leave;
• Claiming statutory sick pay;
• On a training course;
• Receiving Disability Working Allowance;
• Over 65/60;
• Receiving some form of compensation (like payment in lieu); or
• Claiming Maternity Allowance.
Furthermore, you may be able to claim credits if you are receiving Jobseeker's Allowance.
Class 4 NICYou will have to fill out a self-assessment form if you pay Class 4 NIC. This also applies for income tax, which is also self-assessed. The relevant forms are available from the tax office, but simply stated there are two ways to do this under self-assessment:
• You can fill out the forms and have the tax office assess your tax and NIC for you in September, or
• You can calculate them yourself and send them to the tax office in January.
The rate for payment for year 05-06 of Class 4 NIC is 8% between £4,895 and £32,760, plus 1% of the excess over £32,760.
You must pay Class 4 NIC on profits & enterprise allowance. Pay does not include:
• Personal tax allowances;
• Pension funds;
• Superannuation; and
• Retirement annuity
Note: If a husband and wife are both self-employed, their Class 4 NIC liabilities are separate.
Class 4 NIC exemptions
You are exempt from Class 4 NIC if you are:
• Outside the UK for the year of assessment;
• A sleeping partner;
• A trustee;
• A diver (there are specific regulations that apply to off-shore divers and diving instructors); or
• Over 65/60.
If you are employed and self-employed then you may have to pay Class 1, 2 and 4 NIC.
What do you need to do about it?If you are self-employed it is your responsibility to contact HM Revenue & Customs. There is a £100 fine for failure to inform the Revenue of self-employed status, and more serious fines can be levied if this failure is deemed fraudulent.
If your earnings from self-employment are below a certain level (£4,345 for year 05-06) you may be eligible for an exemption. If you think this is the case you should apply as early in the tax year as possible, as the exemptions granted each year are severely limited.
If you do pay Class 2 NIC you should know that you are entitled to:
• Incapacity benefit;
• Widow's benefit;
• Retirement pension; and
• Maternity allowance
Should you become redundant you will not be allowed contribution-based Jobseeker's Allowance.
This is a basic guide to Class 2 and 4 NIC for the self-employed. If you require more details it may be useful to get in touch with your local Social Security Office or the Self-Employment Directorate Call Centre.
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Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence.
Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website.
Article Added Monday, 02 January 2006 | 43422 Hits
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