Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

The old NIC

24 March 2005
Issue: 4000 / Categories: Forum & Feedback , Income Tax
We act for a number of actors who have suffered considerable Class 1 National Insurance (NIC) deductions at source for the year 2003-04...

Deferment of Class 4 NIC has been agreed with the National Insurance Contributions Agency, but we are in dispute with the Inland Revenue in a number of cases where it is insisting on charging the Class 4 NIC 1% surcharge on profits below the upper profits limit.
The Inland Revenue's argument is that the deferment only applies to a 7% charge below the upper profits limit and that the 1% Class 4 charge applies to all profits above the lower profits limit.
We are convinced the Revenue is incorrect, but so far have failed to persuade it to amend its calculations. Can any readers please help?
(Query T16,579) — Thespian.

Thespian's problem is that, without it being evident to the public, there are different sorts of Class 4 deferment and I suspect that National Insurance Contributions Office (NICO) is internally applying the wrong version here — for whatever reason.
But let's start at the beginning and explode a myth that still exists. Let's suppose that an individual has two employments in which Class 1 is paid and that the 'maximum' — as it is now mis-named — is exceeded. In that case, a deferral application will result in the employer in the second job deducting 1% contributions from the employee on all earnings above the earnings threshold — not just above the Upper Earnings Limit as many still think. Such thinkers do not appreciate that the 1% surcharge introduced from 6 April 2003 applies to everything that is above the threshold of (currently) £4,745 for each of Class 1 and Class 4. Another way of looking at it for those who still do not accept this, is that we all now pay 1% NIC whenever the rate used to be 0% (i.e., either on earnings above the upper earnings limit/upper profits limit or where deferment applies), except if the reason for the 0% is that it is below either threshold (strictly — the lower profits limit for Class 4).
So to that extent NICO is right — but they are still wrong in this case.
That same principle will also apply if someone is employed (including some situations where the earnings are in fact less than the upper earnings limit) and at the same time self-employed in completely separate activities. In that situation, there will generally be a residual 1% charge on all the profits above the lower profits limit. That also is sometimes not accepted by advisors, but it is correct for the reason mentioned above.
So to the actors. Here the Class 4 NIC position is rather different from that outlined immediately above as the 'Class 1-able' income is actually the very same income stream as (some of) the profits which form the basis of the Class 4 charge. In this case, the amount of earnings subjected to Class 1 should simply be deducted from taxable profits before calculating the Class 4 liability, otherwise at least 1% would be charged twice — once as Class 1 and again as Class 4 — on the same income. This result, though, depends upon a Class 2/4 deferral application having been made on form CA72B and the box 10d (on the 2004-05 version, the Inland Revenue is very late yet again this year in getting the new year's leaflet onto its website) being ticked. This is the question that says — 'Are any of these earnings chargeable to income tax under case (sic) I or II of Schedule D? (For example, you hold a Schedule D or NT tax code).'
So either Thespian's client has not ticked this box or else NICO is completely at fault.
Thespian does not mention how the Class 1 NICs are treated in the client's accounts, but I will do so, as I have received quite a few queries about this latterly. Members of the acting profession seem to have taken it upon themselves to tell their accountants that they are preparing their accounts wrongly! Actors go on to say that the employees' Class 1 that they have suffered is a tax deductible expense in their profit and loss account, because that is the way their mate does it. Whilst 'their mate' may indeed do it that way, that is not in fact correct — the amount should be charged to drawings. Those who bow to their actor clients' demands will fall foul of TA 1988, s 617(3) which denies tax relief for, inter alia, primary (that is, employees') National Insurance contributions. From various calls I have received, it is clear that a few actors and the like ought to be getting tax enquiries very soon!

Issue: 4000 / Categories: Forum & Feedback , Income Tax
back to top icon