Help re class 4 national insurance

[pantheman]

My son in law is self employed as a grounds worker in the building trade. He works for the same company but does not get holiday pay etc. His tax is stopped from his pay.

My Daughter does his tax return on line and claims for his tools work wear, all the normal stuff.

She also claims a percentage of his fuel costs, gas, electric and water. This I thought this a bit odd.

He has just been informed that he should have been paying Class 4 National Insurance resulting in a fine for last year and a £900 NI bill plus and another amount for this year (2011-12).

I don't think this can be right! he earned about £18,000 last year and paid class 2 contribution.

I cannot seem to find anything to clarify about when you have to pay class 4 except the use of the word earnings for class 2 and profit for class 4. my daughter says as he provides a service he is therefore a business and his earnings are profit. I disagree as I see his earning as wages, but Daddy is not always right.

They are scared to query this in case they stir things up and end up getting more fines and payment demands for past years. with 3 children under 10 they need every penny.

Any help would be greatly appreciated.

[Nystagmite]

I think http://www.hmrc.gov.uk/working/intro/class4.htm may be of some help. I'm with your daughter on this -money he makes from a business, to me is a profit and wages are paid from that.

[Sidewinder]

Have to say I agree from my limited knowledge. If you are self-employed, then your earnings (they are not wages in the same sense as for an employee) are profits of your business, and are liable for Class 2 AND Class 4 NI contributions. Class 2 at a flat rate and Class 4 at 9% of profits.

 

It should work that the business costs (including electricity, heating etc if the home is also used as a business premises) are offset against the earnings of the business and the remainder is classed as 'profits' and those are subject to taxation.

[pantheman]

I think http://www.hmrc.gov.uk/working/intro/class4.htm may be of some help. I'm with your daughter on this -money he makes from a business, to me is a profit and wages are paid from that.

Thanks for the link Nystagmite and your input. I understand what you are saying and maybe I am looking at this from the wrong angle.

my assumption is that if you are self employed you are like "employed" people entitled to earn a wage from you labour and therefore employed or self employed you pay the same NI contributions however if self employed and you sell a product or anything else besides your labour and make a profit on that you are liable for class 4 NI. ( This point seems to have been covered by Sidewinders post above and has possibly destroyed my argument).

Whilst your link tells you the thresholds etc it does not (to me anyway) tell you that if your circumstances are XY&Z you pay class 2 and if they are AB&C you have to pay class 4. I and my daughter have searched everywhere trying to find a concrete statement that clearly lays out when and when not you have to pay class 4 and I can only find, as on your link, the exceptions. one being when you are over retirement age.

[Sidewinder]

Just a bit more reading which may help.....

 

From http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/NationalInsurance/IntroductiontoNationalInsurance/DG_190048

 

If you're self-employed

If you're self-employed you pay Class 2 and Class 4 National Insurance contributions. The rates are:

Class 2 National Insurance contributions are paid at a flat rate of £2.50 a week

Class 4 National Insurance contributions are paid as a percentage of your annual taxable profits - 9 per cent on profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount

If your profits are expected to be less than £5,315 you may not have to pay Class 2 National Insurance contributions.

From April 2011, your Class 2 National Insurance contributions payments will become due on 31 January and 31 July, the same as a Self Assessment tax bill. You pay Class 2 National Insurance contributions either monthly or six monthly by Direct Debit – follow the first link below for more information about payment dates.

 

http://www.hmrc.gov.uk/leaflets/se1.pdf

 

http://www.hmrc.gov.uk/working/intro/employed-selfemployed.htm

 

This link gives details of exceptions to Class 4 http://www.hmrc.gov.uk/manuals/nimmanual/nim24510.htm

 

This link gives details of under what circumstances Class 4 contributions are payable http://www.hmrc.gov.uk/manuals/nimmanual/NIM24001.htm

[pantheman]

Have to say I agree from my limited knowledge. If you are self-employed, then your earnings (they are not wages in the same sense as for an employee) are profits of your business, and are liable for Class 2 AND Class 4 NI contributions. Class 2 at a flat rate and Class 4 at 9% of profits.

 

It should work that the business costs (including electricity, heating etc if the home is also used as a business premises) are offset against the earnings of the business and the remainder is classed as 'profits' and those are subject to taxation.

 

Hi Sidewinder, thanks for your input, my knowledge is possibly even more limited. I understand what you are saying and do not have a position to defend on this.

This young man has been a sub contractor for the same person for over 11 years. Just over 18 months ago the contractor had over 100 subbies (I think that's the correct spelling) working for him. The young mans research, with a lot of these, he works alongside, is that less than half pay class 4 with no dividing line as to why.

He is paid with tax deducted, submits his tax claim on line and gets a rebate for his outlay connected with work, I think. Only recently has he claimed for the additional items such as gas, electric, water etc as before that he was living with friends but now has his own rented accommodation. Up till then he did not pay class 4 and nothing seemed to be amiss but this year he was informed that he should be paying class 4 and was billed and fined for 2010-2011, again no explanation as to why. Hence I have posted here on his behalf in an attempt to find out if this is correct and if so why all of a sudden. Depending on the explanation he will be able to explain this to all the other subcontractors who can then get their house in order and start paying class 4 before they also get fined or to get them off class 4 cause they have been incorrectly charged for it. either way its clarity of who does and who does not pay and when or when not you are liable for this class of NI.

I hope this makes sense.

[pantheman]

Sidewinder, thanks for the second post. Am I thick or what?-Please dont answer that!

The penny has dropped now-Quote If you're self-employed you pay Class 2 and Class 4 National Insurance contributions.

How did I miss that? must have been looking for something more complicated. Thank you.

[Sidewinder]

I think the dividing line, for those who pay Class 4, will be a mixture of honesty and accounting wizardry.

 

Sadly I am not an accountant, but you mention that your Son in Law earned around £18,000 last year - presumably that was before any consideration was given to the normal work expenses, so once your daughter has claimed relief for amounts of fuel, heat, electricity, workwear etc, then this left a theoretical amount of 'profit' on which HMRC have determined that Class 4 NI contributions should be made in the amount of £900.

 

The minimum profit level level at which Class 4 was applicable for 2010/11 was £5715 and the rate was 8%. The £900 will represent 8% of whatever was declared to have been 'profit' over and above £5715. (The threshold rises in the 2011/12 tax year to £7225 but so does the rate - to 9%) Is it possible that those who say that they aren't having to pay Class 4 have been able to establish a higher level of business expenses in order to declare profits which fall below the threshold? Are they using accountants to prepare their returns? I know of several people who seem to think their accountants are so good that HMRC invariably owes them money each year rather than the other way around!

 

Alternatively is it possible that some are using Umbrella Companies to simplify their tax affairs? With these, the Contractor will normally pay the Umbrella Company, who then pay the worker, so that the self-employed worker then becomes an 'employee' of the UC and therefore pays Class 1 NI rather than Class 2/Class 4?

 

Your concern and questions make perfect sense, but I'm afraid that is about the limit of my knowledge on this one!

[Sidewinder]

Sidewinder, thanks for the second post. Am I thick or what?-Please dont answer that!

The penny has dropped now-Quote If you're self-employed you pay Class 2 and Class 4 National Insurance contributions.

How did I miss that? must have been looking for something more complicated. Thank you.

 

Ah - Good! Hopefully my post above still answers some of your other questions.

[pantheman]

Ah - Good! Hopefully my post above still answers some of your other questions.

Thanks for the additional info Sidewinder, it all starts to make sense. As much as taxation can to the man on the street. I just felt aggrieved on his behalf. He works hard and travels miles to jobs and all is reward is more deductions. Maybe a qualified accountant might be the answer (with respect to my daughter). just concerned that if he takes this path the accountants fees could outweigh the benefits but it might be worth it for a financial year just to see what he can wangle, sorry, adjust for him. Once again thanks for your input.

Pantheman

[honeybee13]

Hello there. Your son in law could make enquries with some accountants to see what it would cost. They should see him for half an hour or so for nothing, then he could see which ones he thinks would be best for him. I would see two or three before deciding.

 

My best, HB

[pantheman]

Hi honeybee 13, that's a good idea, didn't know you could do that. Will be on the phone in the morning to one who is highly recommended to see if he offers the service. Might even send the son in law a bill for this help he can then claim that on his expenses Lol.

[honeybee13]

Well, I haven't had recent experience of this, but I don't see why it should have changed. Don't be intimidated by these people, they're there to offer a service and a good one can save you money overall. And don't pay for an initial consultation.

 

Good luck, HB

[pantheman]

Thanks for the advice HB, will let you know how we get on.

Pan