Employment
issues (tax)
National
Insurance
National
insurance contributions (NIC) are essentially a tax on earned
income. The national insurance (NI) regime divides income
into different classes: Class 1 contributions are payable
on earnings from employment, while the profits of the self-employed
are liable to Class 2 and 4 contributions.
National insurance is often overlooked yet it is the largest
source of government revenue after income tax.
Since April 1999 the collection of NIC has been under the
control of the Revenue to promote greater alignment of tax
and NICs.
We highlight below the areas you need to consider and identify
some of the potential problems. Please contact us for further
specific advice.
Scope
of NICs
Employees
Employees are liable to pay Class 1 NIC on their earnings.
In addition a further secondary contribution is due from the
employer.
Employee contributions are only due when earnings exceed a
'primary threshold' (£91 a week in 2004/05 and
£94 in 2005/06). The amount payable is 11% of the earnings
above £91 (£94) up to earnings of £610 (£630
in 2005/06) a week. In addition there is a further 1% charge
on earnings above £610 (£630) a week.
Secondary contributions are due from the employer of 12.8%
of earnings above the ‘primary threshold'. There is no
upper limit on the employer's payments.
Benefits in kind
Employers providing benefits in kind such as company cars
for employees have a further NIC liability under Class 1A.
Contributions are payable on the amount charged to income
tax as a taxable benefit.
Most benefits are subject to employer’s NI. The current
rate of Class 1A is the same as the employer's secondary contribution
rate – ie 12.8%.
The self-employed
NICs are due from the self-employed as follows:
- flat
rate contribution (Class 2)
- variable
amount based on the taxable profits of the business (Class
4).
Class
2 contributions are generally paid by direct debit (the rate
is £2.05 a week in 2004/05 and £2.10 in 2005/06)
while Class 4 contributions are collected with the income
tax liability payable on the profits of the business.
Class 4 is payable at 8% on profits between £4,745 (£4,895
in 2005/06) and £31,720 (£32,760 in 2005/06).
In addition there is a further 1% charge on profits above
£31,720 (£32,760).
Voluntary contributions
Flat rate voluntary contributions are payable under Class
3 (£7.15 a week in 2004/05 and £7.35 in 205/06).
They give an entitlement to basic retirement pension and may
be paid by someone not liable for other contributions to maintain
a full NIC record.
Potential
Problems
Time
of payment of contributions
Class 1 contributions are payable at the same time as PAYE
ie monthly. Class 1A contributions are not due until 19 July
after the tax year in which the benefits were provided.
It is therefore important to distinguish between earnings
and benefits.
Earnings
Class 1 earnings will not always be the same as those for
income tax. Earnings for NI purposes include:
- salaries
and wages
- bonuses,
commissions and fees
- holiday
pay
- certain
termination payments.
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Problems
may be encountered in relation to the treatment of:
- expense
payments
- benefits
in kind.
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Expense
payments will generally be outside the scope of NI where they
are specific payments in relation to identifiable business
expenses. Round sum allowances give rise to a NI liability.
In general benefits are not liable to Class 1 NIC. There are
however some important exceptions including:
- most
vouchers
- stocks
and shares
- other
assets which can be readily converted into cash
- the
payment of an employee’s liability by an employer.
Directors
Directors are employees and must pay Class 1 NIC. However
directorships can give rise to specific NIC problems. For
example:
- directors
may have more than one directorship
- fees
and bonuses are subject to NIC when they are voted or paid
whichever is the earlier
- directors’
loan accounts where overdrawn can give rise to a NIC liability.
We
can advise on the position in any specific circumstances.
Employed or self-employed
The NIC liability for an employee is higher than for a self-employed
individual with profits of an equivalent amount. Hence there
is an incentive to claim to be self-employed rather than employed.
Are you employed or self-employed? How can you tell? In practice
it can be a complex area and there may be some situations
where the answer is not clear.
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In
general terms the existence of the following factors
would tend to suggest employment rather than self-employment:
- the
‘employer’ is obliged to offer work and
the ‘employee’ is obliged to accept it
- a
‘master/servant’ relationship exists
- the
job performed is an integral part of the business
- there
is no financial risk for the ‘employee’.
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It
is important to seek professional advice at an early stage
and in any case prior to obtaining a written ruling from the
Revenue.
If the Revenue discover that someone has been wrongly treated
as self-employed, they will re-categorise them as employed
and are likely to seek to recover arrears of contributions
from the employer.
Enforcement
The Revenue is expected to make over 100,000 compliance visits
each year in an attempt to identify and collect arrears of
NIC. They may ask to see the records supporting any payments
made.
The Revenue has the power to collect any additional NIC that
may be due for both current and prior years. Any arrears may
be subject to interest and penalties.
Please contact us for advice on NIC compliance and ways to
minimise the effect of a Revenue visit.
How
We Can Help
Whether
you are an employer or employee, employed or self-employed,
awareness of NIC matters is vital.
The Revenue has wide enforcement powers and anti-avoidance
legislation available to them. Consequently it is important
to ensure that professional advice is sought so that all compliance
matters are properly dealt with.
We would be delighted to advise on any compliance matters
relevant to your own circumstances.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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