C1-C2 1. Understand the UK System as relevant to the needs and circumstances of individuals and trusts Flashcards
15 marks
Where are the rules for taxing income from employment, pensions and state benefitrs contained in?
Income Tax (Earnings and Pensions) Act 2003
Where are the income from trading, property, savings and other investments, and miscellaneous sources is covered in?
Income Tax (Trading and Other Income) Act 2005
What was basis of assessment?
How has it changed?
Self-employed individuals can prepare their annual accounts to whatever date of tax year they choose.
Does not need to coincide with the tax year
Now changed for 2024/2025 tax year - it now coincides with normal tax year 6/04/2024 - 05/04/2025
What is overlap profits?
When profits are taxed more than once due to application of the opening year rules
How long is the transitional period for profits to be spread? When did it start from
These transitional period additional profits will automatically be spread over a period of five years starting from 2023/24
When are transitional period additional profits not taken into account
- Calculating income for pension annual allowance
- High income child benefit charge
What is the trading allowance
Annual £1,000 that does need to be declared on tax return (before deducting expenses)
How can is income from property taxed differently from UK domcile and non-UK domicle
Income from UK property is taxable whether received by UK or non-UK resident.
However, overseas property is taxable only when property business is carried out by UK RESIDENT
What is the criteria for accounts in property to be drawn up on simplified cash basis?
If income before deducting expenses is £150,000 or less (unless landlord drops out)
What is the tax relief for finance cost in respect to residential property restricted to
Generally mortgage interest - restricted to basic tax deduction from landlord income tax liability (20%)
What is the property allowance
£1,000 (before deducting expenses)
What is rent a room relief
£7,500
What does the restriction of financce cost not apply to?
Furnished holiday lettings or non-residential proeprty (office,warehouse)
How is investment income taxed to UK domicle and non-domicile
UK resident: Regardless whether source within or outside UK
Non-UK resident: Taxable only if its source within UK
No deductions are allowable against investment income
Who is responsible for assessing taxes on other income?
Person entitled to the income
What is a summary of taxation provisions
ITTOIA 2005 part 2 - Trading and professional income
ITTOIA 2005 part 3 - Property income
ITTOIA 2005 part 4 - Investment income
ITTOIA 2005 part 5- All income not covered elsewhere
ITEPA 2003 - Employment, pension and state income
What is the difference between HMRC definition of self-employed and employee
What are some benefits of being self-employed
Contract of service (employee)
Contractor for services (self-employed)
Advantages:
Treatment of expenses: Crietria is less strict on self-employed (within reason)
Less NI costs: Class 4 (self-employed) + Class 2 (negligble) , Class 1 on employee (higher than class 4 %)
Whos duty is it to correctly deterimine if an individual is an employee or self-employedr?
The Employer
How is a salaried member of LLP taxed?
If they aren’t taxed this way, then what are the criterion that must be met?
Taxed as an employee of LLP unless
20%+ of members remuneration is based on profitability of LLP as a whole
Member has significant say in running business
Member has made significant capital contribution to LLP - member has invested at least 25% of expected income from LLP for particular tax yeear
Which financial infrastructures do not pay tax on interest at source?
- Banks, building socieities
- Unit trusts
- OEICs
- Investment Trusts
Interests are all paid gross and not deducted at source (so has to be done on self-assessment basis of owner)
How are corporate bonds interest paid out?
Interest is paid gross and not deducted at source
How is interest paid out from a company,** partnership** (which company is a member), pays interest to indivdual or a non-UK company)
Tax is deducted from the interest
Who can claim back the tax from interest?
Non-taxpayer if the interests fall wtihin psa or is taxed a t starting rate of 0% applicoable to savings income
How are rewards treated by banks (such as £5 pm to maintain balance)
Paid net of basic rate tax do not benefit from PSA
How are annutiies taxed?
(If not wholly paid out of profits/gains)
Payer deducts 20% if annuity is not wholly paid out of profits or gains subject to income tax
Payer must inform HMRC and pay over tax
Example:
Trust has income of £3,000 - which is subject to tax
**Pays annuity of £5,000 **per month
As £5,000 > £3,000 - not wholly out of profits as income is less than annuity being paid out tax man taxes 20%
Taxman takes 20% - £1,000 per month
Beneficiary receiveds 80% - £4,000 per month
How are annutiies taxed?
(If wholly paid out of profits/gains)
If the annuity is paid out of profits or gains that are subject to income tax, the payer is allowed, if they wish, to deduct and retain the tax. This is a means of giving basic rate tax relief to the payer where the payment is made from taxed income.
Trust has income of £10,000
Beneficiary an annuity of £5,000,
Trust may deduct tax of £1,000 (20% of £5,000) and pay the beneficiary £4,000.
The trust does not have to pay the £1,000 to HMRC as such – it is accounted for as part of its normal tax liability on the £10,000 of income.
Most purchased life annuities are paid net of basic rate tax.
How are dividends received from UK company
As gross income (no tax deducted at source)
How is total income calculated
By Rules of ITTOIA 2005 or ITEPA 2003
Then deduct those amounts for whcih tax relief is given by deduction from income (result is net income)
Deduct personal allowance
What are some examples for tax relief
Tax relief is given by deduction from income:
Qualifying interest payments
Allowable business losses
Gifts to charities of shares and securities
Qualifying contributions to registered occupation pensions plan, retirement annuity plans (pension provider does noit give tax relief at source0
What are examples of tax reducers?
Tax relief is given at specified rate and is deducted from taxpayers tax liability
Basic rate tax from property finance cost (20%)
Enterprise investment schemes
Seed enterprise investment schemes
Venture capital trusts
EIS and VCT - 30%
SEIS - 50%
Also payments made net of tax
See pensions
When is interest payments allowable deductions?
If loan is taken out for qualifying purposes.
The loan must fit this criteria:
- Purchase of shares in the borrowers comapny or to finance loans to company
- Investment in a partnership
- Purchase of plant and machinery for use in partnership
- Payment of IHT
What is the cap of interest plus allowable business losses ?
Higher of £50,000 or 25% of person’s adjusted income
What is adjusted total income
Adjusted total income = Total income + Payroll giving - Pension contribution
How is interest on a loan to purchase property calculated?
Non-residential and let - interest is allowable deduction in property-letting account
Residential and let - tax relief given at basic rate deduction from tax payable
Property is not let - No tax for interest
What type of company can gain relief from interest paid on loan?
Purpose of acquiring shares in, or making a loan to, a close trading company.
Relief at £50,000 or 25% of adjusted income
No relief for interest is given if loan is used to buy shares which EIS is given (30%)
Is tax relief avaiable to aprtnership investments?
Tax relief is available to a partner who pays interest on a loan.
How is interest allowable on IHT?
What are the conditions
Relief is restricted to a period of one year from the making of the loan.
Relief is at the borrower’s top rate, but is subject to the cap of £50,000 or 25% of adjusted total income
The borrower must be a personal representative of the deceased.
What is gift aid?
A form of tax relief - to encourage charity giving
Donation is treated net of tax (donor has paid their tax)
Then donations is boosed to gross which is net amount divided by 0.8.
Charity claims back the 20% from HMRC.
Donor receives full tax relief of the “gross boosted amount - which is net(amount they donated)/0.8)
How is payroll giving beneficial for tax
Gives employee tax relief at highest rate under “net pay”
Gifts of assets
Qualify for full relief of CGT and Income tax on gifts
Listed shares and securiities
Unlisted shares (AIM)
Units in unit trusts
Shares in OEICs
Foreign investment schemes
Freehold, leasehold buildings (provided whole interest is given)
What are the tax relief on pensions
Relief at source
Net pay arrangement
Relief by making a claim
What is the limit an individual can contribute to a pension if they have non-relevant UK earnings
£3,600 gross
What is the annual allowance for pension in 2023/2024 tax year
£60,000
What is the taper on annual allowance
For 2023/24, the annual allowance is tapered down to a minimum amount of £10,000 if an individual’s income (including the value of any pension contributions) for the year exceeds £260,000. The rate of reduction is £1 for every £2 that income exceeds £260,000.
How many years can you bring forward for annual allowance
3 years in whcih indivdual was a member of pension scheme
How does relief at source work pension?
Relief at source operates by allowing an individual to make a relievable pension contribution after deducting a sum equal to the basic rate of income tax (20%).
The scheme administrator may then claim from HMRC a repayment of the sum deducted
They will pay a net amount
And scheme operator will net/0.8 and claim back from HMRC to put in pension
Net pay arrangement
Employee payments deducted before tax so employee does not have to claim tax relief.
What is retiremnt annuities tax relief
Deducted from total income
What form must employers complete for each employee provided with benefits
HMRC from P11D
How are employees taxed on a benefit?
Employees are taxed on the cash equivalent of a benefit rather than on its second-hand value. The cash equivalent is broadly defined as the cost to the employer of providing the benefit.
What is the amount that can reduce the list price of a employee car
Contributions of up to £5,000
What is fuel benefit charge
when fuel is provided by the employer for a company car that is used by an employee for private mileage.
2023/2024 - £27,800.
What is the taxable benefit amount for employees and company vans
£3,960 + £757 when van fuel is avaiable for private jouneys
When is fuel benefit not provided?
When no fuel is provided
When fuel is provided for business use
Cost of private fuel is fully reimbursed by the employee
What is the tax on mileage allowance
For income tax purposes, the rate is 45p per business mile for the first 10,000 miles in the tax year, then 25p for each mile thereafter. For NIC purposes, there is a flat rate of 45p for all business miles.
If travelling to a temporary place of work, is this classed as personal or business travel?
Business
If travelling to a usual place of work, is this classed as personal or business travel?
Personal
What is the official rate of interest for taxation of beneficial loans?
2.25%
When is the benefit of interest free or ‘cheap loans’ from an employer, not taxable?
When it does not exceed £10,000
Where an employee occupies rent-free accommodation or pays only a very low rent, there is
generally a tax charge on the benefit.
How is the taxable benefit assessed and would an additional charge be incurred?
How is the additional charge calculated?
First assesed on the annual value (annual rent expected from a normal market), or rent actually paid by employer, if higher
Additional charge is applied if the property value is over £75,000 and owned by the employer.
The value is then multipled by deducting it from £100,000 and multiplying it by 2.25% which is the 2023/24 official rate of interest.
i.e., if property cost is £100,000, then £100,000 - £75,000 = A. Then A x 2.25%.
In which 3 circumstances can an employee avoid being taxed on the benefit of living accommodation? And which 2 can directors who own more than a 5% share in the company, NOT claim?
- Necessary for the employees duties i.e., caretaker
- Helps the employee perform their duties better i,e., publican
- Special threat to employees security
Directors cannot claim 1 and 2
If an employer provides furnishing and equipment in living accommodation, what is the tax benefit charge?
20% market value
What type of income are cash vouchers treated as for tax purposes?
Earnings
When is an employee assessed for tax upon use of a company credit card (company token)?
The date they use the card
What is the annual exemption amount per employee for recommended medical treatment paid by the employer, to help employees return to work?
£500
Are medical examinations and screening costs, funded by the employer, taxable?
No
Name as many potentially tax free “benefits” (12)
group income protection (IP);
the provision of meals;
mobile phones;
long service awards;
suggestion schemes;
work-related training;
relocation and removal expenses;
home-working;
workplace nurseries;
liability insurance;
pension advice; and
trivial benefits.
An employee is not taxed on the provision of a Christmas party, or similar annual event, provided the cost is not more than how much?
£150
When do mobile phones given to employees become a taxable benefit?
More than 1
When do long service awards become taxable?
Award more than £50 per year they have worked (20 years for long service), and the employee has not received a similar award in the last 10 years.
When does a suggestion scheme become a taxable benefit?
When the employee is paid over £25, if the suggestion has some merit and is outside of the employees usual duties.
When is a large award of up to £5,000 under a suggestion scheme, not taxable to the employee
When the suggestion is implemented and;
The award is not more than 50% of the net financial benefit of the suggestion to the employer in the first year, or 10% of the net benefit over five years.
What type of workplace training is generally classed as a tax free benefit? (2)
H&S and first aid
What is the tax free amount of benefit for relocating an employee or funding their removal expenses, where the employer makes this necessary for them to perform their duties?
£8,000
How much tax relief can you claim as an employee working from home and for what?
£6 a week
Business calls, gas and electricity
Not for broadband
What is the tax exemption amount for pension advice to employees?
£500
Is the personal allowance deducted from taxable income, before or after calculating tax liability?
Before
What is the income tax personal allowance?
£12,570
What is the marriage allowance/marriage tax allowance and how does it work?
A transfer of 10% of the £12,570 personal allowance to a spouse or civil partner = £1,260 rounded from £1,257.
When is a transfer of the marriage allowance/marriage tax allowance not allowed? Name 2 circumstances.
When receiving spouse already earns in excess of the basic rate.
When either spouse has claimed married couples allowance (which is different to marriage allowance)
What is the minimum amount that can be transferred to a spouse when using the marriage allowance/marriage tax allowance?
£1,260
In other words, it must be 10%, all or nothing
How far can the marriage allowance/marriage tax allowance be backdated?
4 tax years
Why might someone opt to use the married couples allowance over the marriage allowance?
ecuase your tax is reduced by a greater amount
What is the married couples allowance amount and who does it apply to?
£10,375
Either spouse born before 6 April 1935
You can only have one married couples allowance, as opposed to one for each spouse. Who does the married couples allowance belong to if married before 5 December 2005?
Husband, but can be transferred
You can only have one married couples allowance, as opposed to one for each spouse. Who does the married couples allowance belong to if married after 5 December 2005?
For couples who married on or after 5 December 2005 and for same-sex partnerships registered under the Civil Partnership Act 2004, the allowance in any tax year is given to the partner who is the higher earner in that year.
At what rate is the personal allowance withdrawn when income exceeds the income limit of £100,000?
£1 for every £2 over and up to £125,140
How much is the blind persons allowance?
£2,870
Which taxpayers may extend their income tax bands by the
addition of the gross value of payments into pension schemes, subject to relief at source and donations to charity under gift aid?
Basic and higher rate, not additional
What are the 6 stages of calculating income tax?
- Calculate all the pre-tax income for the year, distinguishing all the different types of income
- Deduct reliefs deductible from total income
- Deduct the personal allowance of £12,570 (and, if applicable, the blind person’s allowance)
- Calculate the amount of any payments for which higher and additional rate relief is given by extending the basic and higher rate bands.
- Calculate the tax on the remaining income.
- Deduct any tax reducers.
Income is taxed in which order?
Earnings, pensions, rental income and all other income, savings, dividend, chargeable gains
E PROS DC
What is personal allowance?
You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
What is the limit for personal allowance
£17,570
What is the main impact of taxation on marriage or civil partnership?
IHT and CGT
Is pocket money taxable?
No! Not classed as income.
Do children receive personal allowance?
Yes and taxed in same way as adults
Who is taxed on interest earned from an account set up by an adult, and invested into by the adult, for a child?
Adult
What is the maximum investment amount for a JISA per tax year?
£9,000 per tax year
What is the low income exemption for taxation of children’s income and when does it apply?
If income less than £100, from investments made by same parent, income is treated as the childs, not the parents
Joe, an additional-rate taxpayer, puts some money into a building society account for his
five-year-old son, Peter. In the first year, the income this generates is £95. Who’s income is this deemed to belong to?
Peter, due to low income exemption
(When the child’s income from all investments made by the same parent is not more than £100, the rule is ignored and the income treated as that of the child)
What are the 2023/24 child benefit rates?
£24.00 a week for the first child and £15.90 a week for each subsequent child
At what amount of earnings does the high income child benefit charge apply and when is the benefit effectively lost completely and why?
Net adjusted income £50,000
£60,000 lost due to tapering between these 2 amounts
What is the amount of tax applied on child benefit?
None, if net adjusted income is less than £50,000, it’s tax-free
If both parents earn over £50,000, who is he high income child benefit tax applied on?
Higher earner
Of the following, which are students not liable to pay back:
tuition fee loans, maintenance loans and postgraduate loans, grants and bursaries.
Grants and bursaries
For the employed, how are student loan repayments collected?
Through PAYE with income tax and NICs
What is the income threshold for when a student loan needs to start being paid, and when is the first payment usually taken?
Income exceeds £25,000 and April, after the course ends
How are student loan repayments calculated?
9% of income in excess of the £25,000 threshold
What term are student loans paid back over and how is the interest rate set?
40 years, RPI
In a bare trust, who owns the asset and owns any income?
Beneficiary
Who is liable for the tax on income from a bare trust?
Beneficiary, because it’s their income
What is a settlor-interested trust?
Where trust income is usually taxed as the parent’s income if they are an unmarried minor
Income of a bare trust for a minor is taxed as the parent’s income when the capital comes from a grandparent or other relative or individual. True or false?
False
According to changes introduced by the Finance Act 2006, if a trust is not a bare trust, what is it likely to be in most circumstances?
Discretionary
Who gets the income in an interest in possession trust?
These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).
What tax allowance do bare trusts have with an irrevocable designated or nominated account?
CGT allowance
What are the 2 categories of vulnerable beneficiary as stated under the Finance Act of 2005?
Disabled persons and ‘relevant’ minor children
To qualify as a ‘disabled person’ in a vulnerable beneficiaries trust, the disabled person must qualify for at least one of which state benefits? (5)
Attendance Allowance;
Disability Living Allowance (DLA) (either the care component at the middle or highest rate, or the mobility component at the highest rate);
Personal Independence Payment (PIP);
Constant Attendance Allowance; or
Armed Forces Independence Payment (AFIP).
The Government has so far not amended the definition of mental illness for disabled persons, so which act should be referred to when ensuring someone qualifies?
Mental Health Act 1983.
With regards ot trust planning, who is a ‘relevant minor child’?
A relevant minor is a child who has not yet attained the age of 18 and at least one of whose parents has died.
How much can a trustee place in a trust each tax year for a relevant minor child, that’s either a bare, discretionary or interest in possession trust?
The lower of £3,000 or 3% of the trust fund - without having to prove that it is for the benefit of the vulnerable beneficiary
What are the four key drivers for potential vulnerability?
Health, life events, capability and resilience
Trustees are allowed a deduction from the income tax that they would pay on a trust for vulnerable beneficiaries, how is this calculated?
Work out normal tax, if say trustee was taxed
Work out beneficiary tax
Difference between the two is then claimed as relief
What is meant by ‘qualifying trusts income’ in regards to life interest and interest in possession trusts: ?
Income from assets held in trust for a vulnerable beneficiary
Are trustees entitled to a personal savings allowance for savings income and dividend allowance?
No
Tax on savings income in a life interest or interest in possession trust, when paid by trustees, is taxed at how much?
20%, higher and additional rates never apply
Life interest and interest in possession trusts: To avoid the trustee paying tax on income they receive in an interest in possession trust, what can be done?
Direct the income straight to the beneficiary
What form should a trustee fill in to declare to a beneficiary details of the net income and tax deducted, so that they may be able to do their own tax return?
R185
Trust expenses are set against income before being paid to the beneficiary in what order?
UK dividends;
foreign dividends;
savings income; and
other income.
Are interest in possession trustees liable to higher rates and additional rates of tax on income received?
No, just 20%. Always 20%.
Life interest and interest in possession trusts: Who is the life tenant in the trust?
Beneficiary
Can trustees deduct expenses in calculating their tax liability?
No
In a discretionary or accumulation and maintenance trust, who has discretion over the distribution of income and capital?
Trustees
Discretionary trusts and accumulation and maintenance
trusts: If a settlor has created more than one trust, what happens to the trustees standard rate band?
Divided equally between the trusts
Discretionary trusts and accumulation and maintenance
trusts: is the standard rate band a tax-free allowance? Explain.
No - any income that falls within the
standard rate band will still be liable to tax, but tax will be charged at the basic rate of
20% for non-dividend income and 8.75% for dividends, rather than the usual higher rates
applicable to trustees.
Discretionary trusts and accumulation and maintenance
trusts: what is the income tax position for trustees when income does not fall within the standard rate band?
39.35% for dividends and
45% for other forms of income – the same rates that apply to an additional-rate-taxpaying
individual.
Discretionary trusts and accumulation and maintenance
trusts: According to the Spring Budget of 2023, if the standard rate band is removed with effect 6 April 2024, what would be put in place instead?
A special
exemption will apply to trusts with income of under £500 per year, where no income tax
will be due.
A Family Trust accumulates all its income and has no expenses, it’s gross interest is £1,000, what is the income tax due?
£1,000 x 20% = £200 (falls within £1,000 standard rate band)
How much income is taxed at standard rate for trustees of a discretionary trust, assuming the settlor has only set up one trust?
£1,000
When trustees of a discretionary trust make an income distribution to a beneficiary, what type of income does this become?
Trust income
4 Classes of NIC
class 1: employees’ and employers’ (percentage rates);
class 2: self-employed (flat rate);
class 3: voluntary (flat rate); and
class 4: self-employed (percentage rates).
Are contributions to registered pension schemes liable to NICs?
No
What is the The Lower Earnings Limit (LEL) amount, and what does it mean?
£123 pw
Up to this level, no NICs are payable
Amount is contained in tax tables
Are company directors liable to class 1 NICs? Explain.
Yes, because they are also employees
What is The Upper Earnings Limit amount, and what does this mean?
£967 pw
Employee NICs are payable at 12% (normal rate), up to this limit
Employer NICs at 13.8%
Why are company directors assessed on an annual basis for NICs, instead of weekly/monthly?
To stop them reducing their NICs liability by paying themselves irregular amounts
What is the class 2 NICs flat rate?
Class 2 is a flat rate of £3.45 per week
Who pays class 2 NICs and in which circumstances?
It is payable by the self-employed with net profits in excess of the lower profits limit of £12,570.
Those with profits between the small profits threshold of £6,725 and £12,570 are deemed to have paid Class 2 NICs, without actually having to pay them.
In other words, they get state credit still.
Employer-financed retirement benefits schemes are subject to NICs. True or false?
False - they are not earnings
Is the benefit of having a company car subject to class 1 NICs?
No, but it’s likely be subject to class 1A NICs though (fringe benefits)
What is the upper limit for employers’ contributions in class 1 NICs?
There is no upper limit
When is an employee a freeport employee?
An employee will be deemed to be working in the Freeport tax site if they spend 60% or more of their working hours in that tax site.
Employers do not pay secondary NICs for a qualifying freeport employee in which circumstances?
For the first three yearsof employment, up to an annual earnings limit of £25,000.
What is meant by:
Lower earnings limit (LEL)
Primary contribution threshold
Upper earnings limit (UEL)
Secondary threshold
entitlement to state benefits but no need to pay NICs
NICs paid at 12% over this amount
NICS paid at 2% over this amount
the level of earnings above which employers have to pay class 1 NICs for employees aged 21 and over, for apprentices aged 25 and over, and for armed forces veterans not in the first year of their civilian employment
What is the amount of the upper secondary threshold (UST), an apprentice upper secondary threshold (AUST) and a veterans’ upper secondary threshold (VUST)?
£967 (same as the UEL)
How much is the freeport upper secondary threshold (FUST)?
£481 per week
What percentage does an employee pay on NICs above the primary contribution threshold and up to the UEL?
12% (main primary percentage) over threshold but below UEL.
2% over UEL (additional primary percentage)
When do employers start paying secondary class 1 NICs for employees aged under 21, apprentices aged under 25 and armed forces veterans in the first year of their civilian employment?
What is the rate paid above this?
Above UEL £967
13.8%
When do employers start paying secondary class 1 NICs for qualifying employees working in freeports?
What is the rate paid?
Above £481
13.8%
What is the annual employment allowance, before they have to pay secondary NICs?
£5,000
In which 2 circumstances could a company not be entitled to the annual employment allowance?
Director is sole employee
Employers contributions were £100,000+ in previous year
What is the purpose in allowing a company an annual allowance so they don’t pay secondary NICs before exceeding this rate?
To encourage employment
What is the married women’s reduced NIC rate
Who is eligible?
£242 to £967 a week 5.85%
Above £967 a week 2%
Married women and widows, elected before 6 April 1977
The election for married women reduced NICs is no longer effective in which 4 circumstances?
divorce or annulment
remarriage
two complete consecutive tax years with no earnings above the LEL and no self-employed
earnings
in some cases, if normal contributions are paid in error
What effect do reduced NI contributions for married women have on the new state pension?
May not build enough NI credit for a full state pension.
Who pays class 1A contributions and what are they?
Employer on fringe benefits such as company cars and private medical insurance. EMPLOYEES DO NOT PAY THESE.
Trivial benefits costing less than how much, are generally free of class 1A NICs.
£50
What is the class 1A NICs rate for 2023/24?
13.8%
When are class 1A payments due to be made?
22 July after the end of the tax year to which they relate,
but on 19 July if the payment is not made electronically. If a deadline falls on a weekend, then payment must be made by the previous working day, unless it is made by ‘faster payments’.
An employer pays its class 1A NICs for 2023/24 electronically. What is the due date?
22 July after the tax year end (2024)`
What form does the employer use to report class 1A NICs?
P11D
What’s the difference between a P11D and P11D(b) form?
P11D (EMPLOYER) - must be completed for each employee who has taxable expenses and/or benefits (unless these have been payrolled).
P11D(b) (EMPLOYEE) shows the NICs due on expenses and benefits (including payrolled benefits) and includes an employer’s declaration that the P11Ds are complete.
When do P11D and P11D(b) forms need to be submitted by?
6 July after the end of the tax year
What are the penalties to employers for late class 1 NICs?
6m+ = 1% of the late amount.
The rate of penalty increases depending on the number of late payments within the same tax year.
A 5% penalty may be charged if payments are more than six months late, with a further 5% charged if payment is still not made after twelve months.
Up to three penalties of 5% may be charged where the annual class 1A payment is made late. At what point do they apply?
initial penalty if full payment is not made within 30 days of the due date
if payment is more than six months late
if payment is over twelve months late
What makes up the The European Economic Area (EEA)?
27 Member States of the European Union + Norway, Iceland and Liechtenstein.
If a UK employee leaves to work in the EU, Norway Iceland or Liechtenstein temporarily, how long can they continue to pay NI instead of the local social security, as long as they have a certificate from HMRC?
EU = up to two years
Norway = 3 years
Iceland or Liechtenstein = no exemption
What is the annual primary threshold for directors NICs and the rate applied when exceeded?
£12,570, with a blended rate of 11.5%
Directors who have an employment contract should not reduce their employment earnings (that is excluding dividends) below what amount?
National living wage
£10.42 (age 23+)
£10.18 (age 21-22)
What are the maximum NICs per year at the main rate for an employee?
The limit is £37,700 (£50,270 – £12,570) × 12% = £4,524.
What is the secondary threshold amount and what does it mean?
£175 pw and means employers do not pay NICs on employee earnings below this amount
FUST – what is it and when does it apply? What does the threshold mean?
Freeport upper secondary threshold £481 pw
Dictates when an employer should pay Class 1 National Insurance Contributions
Is rental income subject to NICs?
No, NICs are only liable on earned income, which does not include rental income
Which class of NICs contributes to state benefits? 2 or 4?
Only class 2 contributions give entitlement to contributory State benefits, such as the new State Pension.
Class 4 NICs do not provide any benefit so it is important to ensure that class 4 NICs are not paid unnecessarily.
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Why would a self-employed person elect to pay class 2 NICs if they don’t need to (for example, they have earned less than the small profits threshold.
To maintain the contribution record for State benefits
What is the small profits threshold where class 2 NICs do not need to be paid?
£6,725
What is the maximum amount of class 4 NICs payable at the main rate?
£3,393.00 (£50,270 – £12,570) × 9%
What is the main rate of class 4 NICs and when is it paid?
9% on profits between £12,570 and £50,270
What is the additional rate on earnings above upper limit for class 4 NICs?
2%
When are class 2 and 4 NICs due to be paid?
2 = January after the tax year starts (i.e., January 2024 for 2023/24 tax year)
4 = paid with income tax, subject to those rules
If you are both overseas and self-employed; who has to pay what when it comes to class 2 and 4 NICs?
2 if you’re usually resident in UK, if not, the contributions may be voluntary
4 if you’re definitely UK resident
Are the self-employed entitled to National Insurance (NI) credits if there earnings are too low to pay class 2 NICs?
No, but they can make voluntary contributions instead
Class 4 NICs are paid by whom and why?
Taxable profits of a self-employed individual.
How much in class 2 NICs is paid at certain profit levels?
Profits over £12,570 - must be paid
Profits between £12,570 and £6,725 - deemed paid
Profits less than £6,725 - no need to pay, but can voluntarily
What is the ‘annual maxima’ of class 1 + class 2 NICs that can be paid for someone who is both employed and self-employed, to avoid excessive liabilty?
£4,335.50 ((£50,270 – £12,570) at 11.5%).
What is the ‘annual maxima’ of class 2 + class 4 NICs that can be paid for someone who is self-employed, to avoid excessive liability?
3,572.40
What is the purpose of class 3 NICs.
They are voluntary contributions that can be made to fill the gaps in an individual’s contribution record.
What is the class 3 voluntary contribution rate?
£17.45 per week (£907.40 per year)
How many years of class 3 contributions can you top up voluntarily?
Class 3 contributions can be paid up to six years after the tax years to which they relate
Why are NICs a significant liability for employers?
No upper limit
How many qualifying years do you need to be entitled to the full state pension?
People retiring require 35 years’ contributions to qualify for the full new State Pension.
