Tag: National insurance contributions

Voluntary National Insurance contributions – should you pay?

The payment of National Insurance contributions provides the mechanism by which an individual builds up their entitlement to the state pension and certain contributory benefits. Different classes of contribution provide different benefit entitlements.

Employed earners pay Class 1 contributions where their earnings exceed the lower earnings limit – set at £118 per week (£512 per month, £6,136 per year) for 2019/20. Self-employed earners pay Class 2 and Class 4 contributions, but it is the payment of Class 2 contributions only which provide pension and benefit entitlement. A self-employed earner is liable to pay Class 2 contributions where their earnings from self-employment exceed the small profits threshold, set at £6,365 for 2019/20. Where profits from self-employment are below the small profits threshold, the self-employed earner is not liable to pay Class 2 contributions but is entitled to do so voluntarily. For 2019/20, Class 2 contributions are payable at the rate of £3 per week.

Qualifying year

A year is a qualifying year is contributions have been paid for all 52 weeks of that year. If there are some weeks for which contributions have not been paid, the year is not a qualifying year. However, contributions can be paid voluntarily to make up the shortfall and turn a non-qualifying year into a qualifying year.

How many qualifying years are needed?

An individual needs 35 qualifying years to receive the full single-tier state pension payable to those reaching state pension age on or after 6 April 2016. To receive a reduced single tier state pension, at least 10 qualifying years are needed.

Should voluntary contributions be paid?

Voluntary contributions may be paid to make up the shortfall for a year where Class 1 or Class 2 contributions were not paid for the full 52 weeks or for a year for which there was no liability to either Class 1 or Class 2.

Before paying voluntary contributions, it is necessary to ascertain whether the payment of such contributions would be worthwhile. The starting point is to check your state pension. This can be done online at www.gov.uk/check-state-pension.

If you already have 35 qualifying years (or will do by the time state pension age is reached), there is no benefit in paying voluntary contributions. However, if you have less than 35 years, it may be worthwhile to increase your state pension. Likewise, if by state pension age you will have some qualifying years but less than 10, it may be worthwhile paying sufficient voluntary contributions to secure a minimum pension.

Class 3 contributions

Class 3 contributions are voluntary contributions and can be paid to boost the state pension.

For 2019/20, Class 3 contributions cost £15 per week. Thus, at these rates, to increase the state pension by 1/35th by paying voluntary Class 3 contributions for a year will cost £780. For 2019/20, the single-tier state pension is £168.60 per week, so at 2019/20 rates, each extra qualifying year (up to 35) is worth £4.82 per week.

Class 3 contributions must normally be paid within six years from the end of the tax year to which they relate – although extended time limits in certain cases.

Voluntary Class 2

Where a person is entitled but not liable to pay Class 2 contributions, paying Class 2 contributions voluntary is a cheaper option, at £3 per week for 2019/20 rather than £15 per week.

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Is tax payable on tips?

The question of whether tips and gratuities are taxable and subject to National Insurance Contributions (NICs) often results in a lively debate. Broadly, their treatment will depend on how they are paid to the recipient.
Cash tips handed to an employee, or say, left on the table at a restaurant and retained by the employee, are not subject to tax and NICs under PAYE, but the employee is obliged to declare the income to HMRC.
Where HMRC believe that employees in a particular employment are likely to have received tips which have not been declared, they will generally make an estimate of the tips earned on the basis of facts available to them. HMRC often make an adjustment to an employee’s PAYE tax code number to reflect the amount likely to be received during a tax year and the tax and Class 1 NICs due will be collected via the payroll.

By contrast, if an employer passes tips to employees that are either handed to them (or the employees) or left in a common box/plate by customers, the employer must operate PAYE on all payments made. Tips will also be subject to PAYE if they are included in cheque and debit/credit card payments to the employer, or if they pass service charges to employees.
The obligation to operate PAYE remains with the employer where the employer:
• delegates the task of passing the tips or service charges between employees, for example to a head waiter in a restaurant; or
• passes tips/service charges to a tronc (see below) but the tronc is not a tronc for PAYE purposes.

Examples
Marcia, a restaurant owner, passes on all tips paid by credit/debit card to her employees. She has made a payment to her staff and must operate PAYE on these payments as part of the normal payroll.
Franco, also a restaurant owner, allows all cash tips left on tables to be retained in full by his staff. However, to ensure the kitchen staff receive a share, he collects all the cash tips and shares them out to the staff at the end of each day. Franco is involved in the sharing out of the tips and he must therefore include the amounts received as part of the payroll and operate PAYE on them.

Troncs
Where tipping is a usual feature of a business, there is often an organised arrangement for sharing tips amongst employees by a person who is not the employer. Such an arrangement is commonly referred to as a ‘tronc’. The person who distributes money from a tronc is known as a ‘troncmaster’. Where a person accepts and understands the role of troncmaster, he or she may have to operate PAYE on payments made. Broadly, under such arrangements the employer must notify HMRC of the existence of a tronc created and provide HMRC with the troncmaster’s name.
There are no hard and fast rules regarding how a tronc should operate and HMRC will apply the PAYE and NIC rules to the particular circumstances of each tronc. Where payments made from a tronc attract NICs liability, responsibility for calculating the NICs due and making payment to HMRC rests with the employer. If a troncmaster is responsible for operating PAYE on monies passed to the tronc by the employer and has failed to fulfil his or her PAYE obligations, HMRC can direct the employer to operate PAYE on monies passed to the tronc from a specified date.

NICs
Legislation provides that any amount paid to an employee which is a payment ‘of a gratuity’ or is ‘in respect of a gratuity’ will be exempt from NICs if it meets either of the following two conditions:
• it is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example by customers; or
• it is not allocated, directly or indirectly, to the employee by the employer.

Review business records
It is worthwhile checking that businesses treat tips and gratuities correctly. From time to time HMRC carry out reviews of employers’ records to make sure things are in order for PAYE, NICs and separately for the National Minimum Wage (NMW). Any errors in tax and NICs treatment could prove costly.

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Directors’ NICs – the correct way to pay

The non-cumulative nature for calculating National Insurance Contributions (NICs) makes it possible to manipulate earnings to reduce the overall amount payable by taking advantage of the lower rate of primary Class 1 contributions payable once the upper earnings limit has been reached. For example, an employee who is paid £3,000 each month of the year will pay considerably more in primary contributions than someone who is paid £600 for 11 months and £29,400 for one month, even though their total earnings for the year are the same.

Company directors often have greater scope to influence the time and amount of payments they receive as earnings, which potentially gives them the ability to avoid primary Class 1 contribution liability by astute use of the earnings period rules. For this reason, therefore, special rules exist which provide that a director’s earnings period is a tax year, even if he or she is paid, say, monthly or leaves the company during the year.

The only exception to the above rule is where a director is first appointed during the course of a tax year. Where this happens, the earnings period is the period from the date of appointment to the end of the tax year, measured in weeks. The calculation of the earnings period includes the tax week of appointment, plus all remaining complete weeks in the tax year (i.e. week 53 is ignored for this purpose). This is known as the pro rata earnings period.

Example

Frank is appointed to the board of directors of Widgets Ltd in week 44 of the tax year. The primary threshold and upper earnings limit are calculated by multiplying the weekly values by 9, because the earnings period starts with the week of appointment. This means that in 2018–19, Frank will pay NIC at the main rate of 12% on his director’s earnings between £1,458 (9 × £162) (the primary threshold) and £8,028 (9 × £892) (the upper earnings limit) and at the additional 2% rate on all earnings above £8,028 paid up to 5 April 2019.

The significance of being a company director is that an annual earnings period must be applied for NIC purposes. It is therefore important to be clear as to who the directors of a company actually are. For example, there may be persons within the organisation who are called directors, but for whom that is just an honorary title.

The definition of ‘director’ is wide and extends beyond someone registered as a director with Companies House. For these purposes a director means:

  • in relation to a company whose affairs are managed by a board of directors or similar body, a member of that board or similar body;
  • in relation to a company whose affairs are managed by a single director or similar person, that director or person; and
  • any person in accordance with whose directions or instructions the company’s directors (as defined above) are accustomed to act.

However, a person giving advice in a professional capacity is not treated as a director.

Companies can save time and money by calculating directors’ NIC in a similar way to other employees. Instead of paying very high levels of NIC on a short-term basis, directors who are paid regularly (e.g. directors who have contracts of service with their companies) can spread their contributions evenly throughout the tax year. The earnings period remains an annual earnings period, but contributions are made on account throughout the tax year. A recalculation on an annual basis is performed when the last payment is made and any outstanding National Insurance due is paid at that time.

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