LECTURE 8: National Insurance, Capital Gains Tax Flashcards
Class 1 National insurance contributions.
Class 1 NICs are payable in relation to employees aged 16 or over. The employees pay primary contributions and the employer pays secondary contributions. EMployee contributions are not required after the employee reaches state retirement age, but employer contributions are still required.
2017/18 employee (primary) contributions
12% on earnings from £8,164 - 45,000 p.a.
2% on earnings above £45,000
Limits are annual limits, for employees paid weekly/monthly, the equivalent weekly/monthly limits are used. Annual limits are always used for directors.
Example 1
Employment income of £50,000
Employee contributions
(£45,000 – 8,164) x 12% 4,420.32
(£50,000 – 45,000) x 2% 100.00
4,520.32
Employer contributions
(£50,000 – 8,164) x 13.8% 5,773.36
2017/18 employer (secondary) contributions
13.8% on earnings from £8,164 p.a.
There is an employment allowance of £3,000 available for employers to set off against their secondary contributions. This is not available to companies with single director and no employees.
Example 1
Employment income of £50,000
Employee contributions
(£45,000 – 8,164) x 12% 4,420.32
(£50,000 – 45,000) x 2% 100.00
4,520.32
Employer contributions
(£50,000 – 8,164) x 13.8% 5,773.36
Class 1A National insurance contributions.
Employers are required to pay class 1A NI at 13.8% on all benefits provided to P11D employees.
Class 2 and 4 National insurance contributions.
Payable by self-employed people over 16 and under pensionable age.
Class 2 - the 17/18 flat rate is £2.85 per week if profits are over £6,025 p.a.
Class 4 -
9% on profits between £8,164 and £45,000 p.a.
2% on profits above £45,000
CAPITAL GAINS TAX
Charged on the disposal of capital assets.
Do limited companies pay capital gains tax?
Limited companies do not pay CGT. Corporation tax is charged on their chargeable gains.
How is a capital gain calculated?
Proceeds (net of selling expenses) less cost (all capital costs, including incidental expenses incurred in buying the asset)
Assets exempt from capital gains tax.
- Motor vehicles suitable for private use.
- Govt. stock
- Debentures (qualifying corporate bonds)
- Principal Private Residence
- Certain chattels
CHATTEL
Tangible, movable property
Exemptions for chattels
Chattels sold for £6,000 or less are exempt from CGT.
Chattels with remaining useful life of less than 50 years are also exempt, unless used in a trade, profession or vocation.
Computation for chattels sold for more than £6,000
Chattels sold for > £6,000, remaining useful life of 50 years or more:
Gains can be restricted to:
5/3 * (gross sales proceeds - £6,000)
E.g Painting purchased May 2004 for £2,400, sold Nov. 17 for £6,500.
Proceeds £6,500
Cost (2,400)
4,100
OR 5/3 (6,500 – 6,000) = £833
i.e £833
Computation for chattels sold for less than £6,000, but bought for more than £6,000
Loss relief available, BUT use proceeds of 6,000 in CGT calculation instead of actual proceeds.
Example
Painting purchased November 2002 for £7,500, sold May 2017 for £3,000.
Allowable loss is:-
Deemed proceeds £6,000
Cost (7,500)
(1,500)
CGT annual exemption
17/18 annual exemption is 11,300. Available to individuals, not limited companies.
What are the rates of CGT?
Although taxed separately from income, capital gains are treated as the top slice of income (i.e. after non-savings, savings and dividends), and are taxed thus:
Any balance of 1st 33,500 @ 10%
Rest @ 20%
However, taxable gains on the disposal of residential property are taxed at 18% and 28% in 17/18
CAPITAL LOSSES
Capital losses can be set against capital gains of the same tax year (before the Annual Exemption), or carried forward and set against future capital gains (after the Annual Exemption).
Example
Colin buys a holiday home for £30,000 in 1997, and sells it in 2017/18 for £95,000. In 2017/18 he also incurs capital losses of £50,000 on the sale of shares. Calculate the CGT payable. Colin’s only other income in 2017/18 is a salary of £20,000.
Solution
Proceeds re holiday home £95,000
Cost (30,000)
Gain on holiday home 65,000
Current year losses (50,000)
AE (11,300)
3,700
18% £666
What if current year losses had been 60,000?
Gain on holiday home 65,000
Current year losses (60,000)
AE (5,000)
nil
What if there were no current year losses, but there had been losses brought forward of £60,000?
Gain on holiday home 65,000
AE (11,300)
53,700
Losses b/f (53,700)
nil
Losses to carry forward £60,000 – 53,700 = £6,300
What is the cost of a part disposal?
Cost of part disposed is:
Cost of whole asset * (A/(A+B))
Where A = Proceeds
B = Market Value, at date of disposal, of part retained.
E.g Harry purchases a building in April 2006 for £300,000
Part of it is sold in Dec 2018 for £100,000, when the whole building is worth £710,000, and the part remaining £500,000.
Capital gain:-
Proceeds £100,000
Cost £300,000 ´ 100 = (50,000)
100+500
Gain £50,000
Examples of wasting assets
Patents
Copyrights
WASTING ASSETS
The original cost of a wasting asset is deemed to waste away on a straight line basis over the asset’s life.
Example
Jamie purchases a 25 year copyright on 1.1.13 for £12,500, and sells it on 1.1.18 for £11,000.
Proceeds £11,000
Cost 12,500 x 20/25 (10,000)
Gain 1,000
(20 is 25-5)
Capital gains tax on leases
Sale of a short lease (50 years or less) - allowable cost is:
Cost * (%applicable to remaining life on disposal/ % applicable to remaining life on acquisition)
%s found from lease percentage table. Example On 1 January 2013 Bill acquires a 21 year lease of business premises, paying a premium of £16,500. On 1 January 2018 he sells the lease for £25,800. Solution
Proceeds (16 year lease) 25,800
Cost
16,500 * (64.116% / 74.635%) 14,175
Gain 11,625
