F6 Taxation (UK)

2 Taxation (UK) Section A: The UK tax system Section B: Income tax liabilities Section C: Chargeable gains Section D: Corporation tax liabilities Section E: Inheritance tax Section F: National insurance contributions Section G: Value Added Tax Section H: The obligations of tax payers and/or their agents

3 National Insurance Contributions F1. National insurance: scope and class 1 and 1A contributions for employed persons F2. Class 2 and Class 4 contributions for self- employed persons F1. National insurance: scope and class 1 and 1A contributions for employed persons F2. Class 2 and Class 4 contributions for self- employed persons Designed to give you knowledge and application of:

4 Section F: National Insurance Contributions  Describe the scope of national insurance. [2]  Compute Class 1 and Class 1A contributions for employed persons. [2]  Compute Class 2 NIC. [2]  Compute Class 4 NIC. [2] Learning outcomes

5 Describe the scope of national insurance National Insurance Contributions (NICs) are mandatory contributions for both employer and employees once an employee’s earnings exceed a specified threshold. Main classes of NIC Paid by employee Class 1 Primary Class 1 secondary & 1A Paid by employers Paid by self employed Class 4Class 2 Paid by self employed Applicability

6 Compute Class 1 and Class 1A contributions for employed persons  Paid by employees from age 16 to state retirement age (women 60 years; men 65 years)  Charged on earnings - earnings mean gross pay  Employer deducts NICs from pay via PAYE  Due under PAYE by 19th of following month Class 1 Contributions are calculated on benefits received in cash and or those which are easily converted into cash Class 1 A Contributions are calculated on benefits received in kind Class 1 primary Exempt from Class 1  Business expenses reimbursed  First £55 per week of childcare vouchers  Tips from third parties  Mileage allowances not exceeding the statutory rates  Exempt benefits

7  Employees are paid weekly or monthly – known as the ‘earnings period’.  Class 1 calculated by reference to the earnings paid in the earnings period.  Lower and upper limits apply but all earnings over the lower limit will be subject to some NICs. Earnings period Earning period

8 The annual lower and upper limits are given in the exam as follows: National Insurance Contributions (Not contracted out rates) % Class 1 Employee£1 – £5,715 per yearNil £5,716 – £43,875 per year11.0 £43,876 and above per year1.0 Class 1 Employer£1 – £5,715 per yearNil £5,716 and above per year12.8 Class 1AOn amount of taxable benefits12.8 Class 2£ 5,075 or more per annum£2.40 per week Class 4£1 – £5,715 per yearNil £5,716 – £43,875 per year8.0 £43,876 and above per year1.0

9 Employee’s earningsClass 1 primary contributions payable Less than £5,715Nil £5,715 to £43,875(Earnings – Primary threshold) x 11% More than £43,875(£43,875 – £5,715) x 11% Plus (Earnings – (£43,875) x 1% Class 1 is calculated as  Paid by employers for employees aged over 16 (no upper limit)  Payable on all earnings above £5,715 & paid monthly under PAYE  Class 1 secondary is deductible when calculating trading income Class 1 secondary NIC Employee’s earningsClass 1 secondary contributions payable Less than £5,715Nil More than £5,715(Earnings – Primary threshold) x 12.8% Class 1 secondary NIC calculated as Class 1 and Class 1 secondary NIC:

10  Paid by employers not employees  Calculated annually  Class 1A is deductible when calculating trading income e.g. living accommodation, assets loaned to employee for private use  Contribution is calculated at 12.8% on the amount of taxable benefits Class 1A NIC  Workplace childcare facilities  First £55 of contracted-for childcare Refer to Quick Quiz on page 448 Exemption Class 1A NIC

11 Compute Class 2 NIC  paid by self-employed  aged between 16 and the state retirement age  flat weekly rate of £2.40 per week if earning above £5,075 for  payments start when the individual turns 16, and cease when they reach the state retirement age  paid to National Insurance Contributions (NIC) Office by monthly direct debit or quarterly billing Class 2 NIC

12 Compute Class 4 NIC  paid by self-employed  start if aged 16, at the start of tax year and profits exceed the lower earnings limit (£5,715)  no longer payable if individuals reach state retirement age at start of year  Class 4 payable on profits Class 4 NIC £1 – £5,715 per yearNil £5,716 – £43,875 per year8.0 £43,876 and above per year1.0 Class 4 NIC rates

13 RECAP  Describe the scope of national insurance. [2]  Compute Class 1 and Class 1A contributions for employed persons. [2]  Compute Class 2 NIC. [2]  Compute Class 4 NIC. [2]