Chapter 8 - National insurance contributions Flashcards
Q: What are the two types of NICs paid by self-employed individuals?
A: Class 2 NICs (flat rate) and Class 4 NICs (based on tax-adjusted trading profits).
Q: Who pays Class 2 and Class 4 NICs?
A: Sole traders and partners aged 16 to state pension age (assumed to be 66 in the exam).
Q: What are the due dates for Class 2 and Class 4 NICs?
A:
Class 2 NICs: By 31 January following the tax year through self-assessment.
Class 4 NICs: With income tax payment on account or balancing payment.
Q: What is the rate for Class 2 NICs, and when is payment treated as made?
A:
Flat rate: £3.45 per week.
Payment is treated as made if profits are between £6,725 (SPT) and £12,570 (LPL), despite the fact that payment isn’t owed under £12,570.
Q: By when must a trader register with HMRC for Class 2 NICs?
A: By 31 January following the end of the tax year.
Q: What are the rates for Class 4 NICs?
A:
0%: Profits up to £12,570.
9%: Profits between £12,571 and £50,270.
2%: Profits above £50,270.
Q: What is the registration deadline for Class 4 NICs?
A: By 5 October following the end of the tax year.
Q: When must payments on account (POAs) for Class 4 NICs and income tax be made?
A:
1st POA: 31 January in the tax year.
2nd POA: 31 July following the tax year.
Q: How are POAs calculated?
A: 50% of the previous year’s income tax and Class 4 NIC liability.
Q: Under what circumstances are POAs not required?
A: If the previous year’s tax liability is:
Less than £1,000, or
Less than 20% of total income tax and Class 4 NIC liability.
Q: What is a balancing payment, and when is it due?
A: Final payment for unpaid income tax, NICs, and CGT, due 31 January following the end of the tax year.
Q: What penalties and interest apply to late balancing payments?
A:
Penalty: Based on delay length and unpaid tax.
Interest: Charged from the due date to the day before payment.
Q: What are Class 1 NICs, and who pays them?
A: National Insurance Contributions on cash earnings:
Class 1 Primary: Paid by employees.
Class 1 Secondary: Paid by employers.
Q: What are the rates for Class 1 Primary NICs (weekly limits)?
A:
0%: Earnings up to £242/week.
12%: Earnings between £242 and £967/week.
2%: Earnings above £967/week.
Q: What are the annual limits for Class 1 Secondary NICs?
A:
0%: Earnings up to £9,100/year.
13.8%: Earnings above £9,100/year.
Q: What are the Class 1 NIC reduced rates for young people and apprentices?
A:
0%: Earnings up to £50,270/year.
13.8%: Earnings above £50,270/year.
Q: What is the employment allowance, and who can claim it?
A: £5,000/year per employer, available unless:
Single-director companies with no other employees.
Employers with prior Class 1 NIC liability ≥ £100,000.
Q: What is Class 1A NIC, and who pays it?
A: Employer-only NIC on taxable benefits (excluding cash-exchangeable vouchers), at 13.8%.
Q: When is Class 1A NIC due?
A: By 19 July (or 22 July if paid electronically) following the end of the tax year.
Q: What is the small profits threshold (SPT) for Class 2 NICs, and why is it significant?
A: The SPT is £6,725. Profits between the SPT and the lower profits limit (LPL) of £12,570 are treated as if Class 2 NICs are paid, even though no actual payment is required.
Q: How are NIC calculations rounded in exams?
A: NIC calculations should be rounded to the nearest pound at each stage of the workings.
Q: What is the difference between payments on account and balancing payments?
A:
Payments on account: Prepayments towards income tax and Class 4
NICs, based on the prior year’s liability.
Balancing payments: Settles any outstanding liability after deducting POAs.
Q: What happens if payments on account exceed the actual liability?
A: Any overpayment is refunded or offset against future tax liabilities.
Q: What are the payment methods and deadlines for PAYE and Class 1 NICs?
A:
Deadline: 19th of each month (extended to the 22nd for electronic payments).
Requirement: Employers with 250+ employees must pay electronically.
Q: What are the key differences between Class 1A and Class 1 NICs?
A:
Class 1 NICs: Paid on cash earnings by employees (Primary) and employers (Secondary).
Class 1A NICs: Paid only by employers on taxable benefits, excluding cash-equivalent vouchers.
Q: How does 2024 being a leap year affect late payment interest calculations?
A: February includes 29 days, which must be accounted for when calculating interest.
Q: How are POAs adjusted if income tax liability decreases significantly from the prior year?
A: A taxpayer can request HMRC to reduce their POAs based on the lower expected liability.
Q: What happens if a trader fails to register for Class 2 or Class 4 NICs by the deadlines?
A: Late registration may lead to penalties and interest charges on unpaid contributions.
Q: What should you assume in the exam about taxpayers’ eligibility for reduced NIC rates?
A: Unless told otherwise, assume taxpayers are over 21 and not apprentices, and employers are eligible for the employment allowance.
