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Replies to Queries - 2 - Money lessons

31 July 2002
Issue: 3868 / Categories:

My client, who is 35 years of age, ceased employment six years ago (having been employed for about six years) when she gave birth to her child.

My client, who is 35 years of age, ceased employment six years ago (having been employed for about six years) when she gave birth to her child.

She has recently commenced self-employment and estimates that her income as a tutor is approximately £80 per week. The only expenses would appear to be for 'use of home as office' in respect of the few hours teaching at home each week. Should (or must) she register as self-employed with the National Insurance Contributions Office and the Inland Revenue now or later? Is there any benefit in her paying Class 3 National Insurance contributions to maintain an entitlement to the National Insurance pension or can she rely on home responsibilities protection?

Is there any other 'standard' advice that should be given to such 'pro-bono' clients, bearing in mind that they may only want to refer to an adviser occasionally, rather than engaging one (and fees) on a full-time basis?

(Query T16,049) - Teacher.

 

As it has not been mentioned that the client is married, I have assumed she is an unmarried mother.

Registration as self employed. As from 31 January 2001 it became necessary to register with the Inland Revenue's National Insurance Contributions Office that one had commenced self employment. This could be done by telephone or in writing, although the easiest way is perhaps to use the official 'starting up in business' form CWF1. On this form it is clearly mentioned 'If you delay telling us about your business for three months or more, you may have to pay a penalty of £100'. In fact the actual three months is from the end of the month in which the self employment started. However, in the Revenue's Tax Bulletin 55, on failing to register in time, it mentions '… Regulation 87(3) of the Contributions Regulations provides that a penalty is incurred for lateness unless the self-employed person can:

  • provide a reasonable excuse for failing to notify the Contributions Office in time, it will apply the criteria set out in paragraph 5060 onwards of the Investigation Handbook, which is available on the Inland Revenue website; or,
  • show that throughout the period between starting self employment and registering, his or her net earnings were less than the pro rata equivalent of the annual small earnings exception limit …'

It also mentions that registration with the National Insurance Contributions Office automatically registers you under self assessment. It is good to know that there is at least some sort of communication between the different parts of what is now all the Inland Revenue!

With estimated earnings, before deductions, of £80 x 52 = £4,160, and with the small earnings exception limit currently £4,025, I take the wording of the query regarding Class 3 National Insurance contributions to mean that there will be an application for a small earnings exemption in respect of the Class 2 contributions. However, with the difference in the current weekly amounts due (Class 2 = £2 and Class 3 = £6.85), and remember the Class 2 exemption is only given if one asks for it, there would obviously be no argument in deciding which one I would opt for!

Regarding expenses, apart from 'use of home as office', where the tutoring takes place, what about professional subscriptions and also any books and stationery? Also it is assumed that because of the nature of the tutoring there is no possibility of being able to claim capital allowances, for example on computer use.

The question is asked as to whether it is more beneficial to pay Class 3 contributions or rely upon home responsibilities protection. This is where individuals who are prevented from earning qualifying years of National Insurance contributions, by virtue of the fact that they are undertaking home responsibilities (such as caring for the elderly, infirm, disabled or children), are deemed to have earned those contributions for the purpose of calculating their entitlement to a basic state pension.

The Revenue's National Insurance Manual at paragraph 25008 answers the question with a question: '… Contributor entitled to home responsibilities protection - Do not accept Class 3 National Insurance contributions if the contributor wants to pay them for a year when he or she was entitled to home responsibilities protection, unless you can confirm it would be more beneficial for him or her to pay Class 3 National Insurance contributions'. It then goes on to give an example and so really the actual answer will depend on future intentions. A helpful factor in this matter is the use of form BR19 'How to get a retirement pension forecast', which, when completed, is sent to the Department for Work and Pensions in Newcastle. That department will then reply giving an estimated future position, based on the history and further expectations of National Insurance contributions paid, or given as credits, during the expected working life of the person concerned. The forecast will also tell if it is possible to do anything to improve one's basic pension.

'Standard' advice to be given is, first and foremost, to keep good records. The amount of information needed in order to complete one's own tax affairs might not seem too enormous, but nevertheless when it comes to accuracy everything counts. Then one has to ask what are the client's future intentions, and does she intend to return to full-time employment when it becomes possible. It should always be made very clear that one's services remain available for future use, so that further one-off consultations will always be available should the need ever arise. Finally, and returning to the subject of pensions, it now seems to have become usual practice to mention stakeholder pension contributions to clients in a similar position as the one in question. - N.K.

 

'Teacher' has raised a few queries. The most difficult to answer may be whether the payment of Class 3 National Insurance contributions - currently £6.85 per week - is a good bet for maximising the client's state pension entitlement in 2027 or probably 2032 or possibly even later, with an unknown chancellor whose fetishes for a credit system may be the deciding factor for the alternative. One really needs a crystal ball, and perhaps the answer to this conundrum is to take an equitable view.

The tutoring activities may, at present, fall below the tax/National Insurance contributions threshold but it is considered that any newly self-employed person should register with the Contributions Agency/tax office. Lord Grabiner's report in March 2000 expressed concern that people in business can drift into the hidden economy only to find it difficult to put their affairs in order and take advantage of the support, advice and business opportunities available to those operating within the formal economy. I am certain that many practitioners can vouch for the fact that so many people have sought assistance owing to falling into the trap of late notification by not realising the rapid success of what may have started as nothing more than a small profitable hobby.

'Teacher' mentions the approximate estimated weekly income is £80. Could this possibly be nearer £90 per week? Coupled with an unexpected bonus from parents, pleased at getting young Euan through the GCSEs could immediately tip the client over the threshold balance. 'Use of home' has been mentioned as the only expense but this would account for little (if Inland Revenue guidelines are to be followed). Telephone/technical literature/books/materials/computer are items usually associated with such activities. Only good record keeping of income and expenditure will determine the bottom line figure.

Regulation 87(3) of the Contributions Regulations provides that a penalty is incurred for late notification. Late is as early as three months. The penalty may be avoided if a reasonable excuse is provided or if it can be shown that throughout the period between starting self employment and registering, the net earnings were less than the pro rata equivalent of the annual small earnings exception limit. 'Teacher' should also not forget the requirement under section 7, Taxes Management Act 1970, to notify chargeability to tax within six months of the end of the tax year. Trainee Revenue tax investigators take great delight with such enquiries. The dual purpose registration form (CWF1) means, of course, a joint notification can now be made.

'Teacher' has asked if there is any other 'standard' advice which should be given in such circumstances. Good record keeping should take little time to prepare the account required for the three line tax return entry and is probably a task which the client could undertake with little guidance. The charity, Taxaid, will always assist taxpayers on low incomes with preparation of their returns; citizens advice bureaux will also give assistance - not to mention the Revenue's very own tax enquiry centres.

Also, are there any other sources of income which need to be taken into account which might tip the threshold scale? Are there any savings accounts for which the banks or building societies have been notified to pay interest gross? All things considered, it is easier and safer to register than not to do so.- Jim.

 

Extracts from further replies received:

'Teacher' should be cautious about advising payment of Class 3 voluntary contributions which are, in effect, a form of investment which can compare unfavourably with other applications of money, notably the stakeholder pensions opportunities. An update on the pension record should be obtained from the National Insurance head office.

'The New Tax Credits' is the title of a wide ranging article by Andrew Goodall in Taxation, 30 May 2002 at pages 238 to 241. See also Inland Revenue leaflet WFTC/BK1 for 'working families', if the client works at least 16 hours a week but does not have free capital exceeding £8,000.- Lane.

 

Home responsibilities protection is an option if there is no National Insurance contributions liability, but a contribution is always better than years being ignored when calculating pension rights, so again common sense should prevail - incapacity benefits, retirement pension, widow's benefit and even maternity allowance are protected for £2 per week.

What we do not know in this case is whether the client is a married woman. If so, then depending on the age of her husband she will be able to rely to a great extent on his National Insurance contribution record. She will get 60 per cent of his retirement pension based on his record when they both retire.

This is the one important issue that should always be considered in this type of case. Is there a husband? Will his contribution record offer some sort of protection if no further National Insurance is paid by the spouse? What does the existing contribution record look like? Is it feasible to get the record of contributions to cover at least 25 per cent of the working life so that some sort of pension is triggered? - Fatman.

Issue: 3868 / Categories:
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