Self-employed : Small Earnings Certificate for previous years

MoonDragon
MoonDragon Posts: 203 Forumite
edited 2 February 2013 at 6:35PM in Cutting tax
Hi all,

I set up a limited company in 2009 and my profit and loss account was alltime less than £5000 and i did not also paid for Class 2 National Insurance Contribution.

However, I have forgotten to apply to the Small Earnings Exception certificate (i was relying on my account who was a bit negligent) and presently I am urgently needing this certificate to prove that I am really self employed.

Thanks in advance for your help.

SilverOne
A cat who's been sprayed with hot water, will then be afraid of his own bowl of innocent fresh water.
«1

Comments

  • I may be missing something here but if you set up a limited company then surely that means you weren't self employed but were a company director and as such class 2 nic isn't relevant to you (unless may you were actually self employed in some other venture?)
  • Yes, Class 2 NI contributions and the small earnings exemption apply to sole traders, not limited companies.
    Who having known the diamond will concern himself with glass?

    Rudyard Kipling


  • I may be missing something here but if you set up a limited company then surely that means you weren't self employed but were a company director and as such class 2 nic isn't relevant to you (unless may you were actually self employed in some other venture?)

    Hello, I think you are right : I worked as a company director (but I am alone in the company) but did two contractors job. When filling the Employment and Support Allowance form (i am presently sick) there was just a field for self-employed person that i used. And the DWP has rejected my claim saying that i am a self employed who had not contributed to class 2 nic.
    A cat who's been sprayed with hot water, will then be afraid of his own bowl of innocent fresh water.
  • Yes, Class 2 NI contributions and the small earnings exemption apply to sole traders, not limited companies.

    I have made a mistake by confusing contractor role as a director of a limited company and a self-employed person.
    A cat who's been sprayed with hot water, will then be afraid of his own bowl of innocent fresh water.
  • Indeed, Class 2 NI (and Class 4 NI on profits above £7,605 per year) only apply to sole traders (also known as self-employed).

    If your only income is derived from your limited company, then your national insurance record can be kept up by paying yourself a salary from the company, on which Class 1 Primary NI (Employees') and Class 1 Secondary NI (Employers') may be due, depending upon the size of the salary taken.

    Your accountant would not have been negligent in not applying for a small earnings exception certificate as this would not have applied to you, as you were not self employed. Your accountant should of course have advised you of how you could keep up your NI record by paying a salary from the company - there are tax efficient ways of doing this which any reputable accountant would certainly advise you of.
    November 2007 £570k 25 years - MF March 2033
    September 2012 £405k 20 years - MF January 2032.
    January 2015 £301k 16 years - MF January 2030
    January 2020 £231k 10 years - MF January 2030
    Mortgage Free Goal: In progress!
    June 2020: Outstanding mortgage £75,211 (£222,414 mortgage offset by £147,203 cashpool)
    August 2020: Outstanding mortgage £59,262 (£134,598 mortgage offset by £75,280 cashpool)
    Sept 2020: Outstanding mortgage £56,682 (£131,760 mortgage offset by £75,022 cashpoool)
    April 2021: Outstanding mortgage £17,278 (£64,646 mortgage offset by £47,313 cashpool)
  • MoonDragon
    MoonDragon Posts: 203 Forumite
    edited 3 February 2013 at 3:08PM
    If your only income is derived from your limited company, then your national insurance record can be kept up by paying yourself a salary from the company, on which Class 1 Primary NI (Employees') and Class 1 Secondary NI (Employers') may be due, depending upon the size of the salary taken.
    I am the only employee (and director) of the limited company.
    My salaries per year were less than £6000 and at the link http://www.hmrc.gov.uk/ni/intro/basics.htm one could read :
    If you're employed

    If you're employed you pay Class 1 National Insurance contributions. The rates are:
    • if you earn more than £146 a week and up to £817 a week, you pay 12 per cent of the amount you earn between £146 and £817
    • if you earn more than £817 a week, you also pay 2 per cent of all your earnings over £817
    You pay a lower rate if you're a member of your employer's contracted-out pension scheme.
    Your contributions are deducted from your wages by your employer.
    But I do not see anything regarding Small Earning Certificate in this case (Class 1 National Insurance contributions) where one earn less than £6000 per year and also less than £146 per year.
    Your accountant should of course have advised you of how you could keep up your NI record by paying a salary from the company - there are tax efficient ways of doing this which any reputable accountant would certainly advise you of.

    I have been advised few months ago about having a salary below something like £5595 (not sure about the exact amount) and to receive the rest as dividend.

    My present problem is that due to my sickness since few months I need to apply on Employment Support Allowance (Income Based) and DWP require an explanation of the reason that I have not contributed to the National Insurance.
    A cat who's been sprayed with hot water, will then be afraid of his own bowl of innocent fresh water.
  • The Small Earnings Exception Certificate only applies to self-employed individuals who would otherwise pay Class 2 National Insurance, and not to an employee drawing a salary from a company (which is what you are doing).

    State benefits begin to accrue once earnings exceed the Lower Earnings Limit in a tax year, which for 2012-13 is £5,564. However no national insurance contributions are actually payable until the Secondary Threshold is reached, which for 2012-13 is earnings of £7,488 (this value is the optimum salary for a director to take in the 2012-13 tax year, topped up by dividends, and your accountant should have advised you of this). So as long as you have taken a salary of at least £5,564 in the 2012-13 tax year, then you will not have a gap in your NI record for this particular tax year. You still have time to pay yourself further salary in 2012-13 if your earnings are below £5,564 - this needs to be done before 5 April 2013.

    However, if your earnings in previous tax years were below the Lower Earnings Limit for those years, then you may indeed have a gap in your NI record. You should discuss with the tax office exactly which tax years are showing as not having a full year of NI contributions.
    November 2007 £570k 25 years - MF March 2033
    September 2012 £405k 20 years - MF January 2032.
    January 2015 £301k 16 years - MF January 2030
    January 2020 £231k 10 years - MF January 2030
    Mortgage Free Goal: In progress!
    June 2020: Outstanding mortgage £75,211 (£222,414 mortgage offset by £147,203 cashpool)
    August 2020: Outstanding mortgage £59,262 (£134,598 mortgage offset by £75,280 cashpool)
    Sept 2020: Outstanding mortgage £56,682 (£131,760 mortgage offset by £75,022 cashpoool)
    April 2021: Outstanding mortgage £17,278 (£64,646 mortgage offset by £47,313 cashpool)
  • However, if your earnings in previous tax years were below the Lower Earnings Limit for those years, then you may indeed have a gap in your NI record. You should discuss with the tax office exactly which tax years are showing as not having a full year of NI contributions.
    For 2011-2012, I had just received dividend due to a breach of negociation/contract with a client abroad.
    A cat who's been sprayed with hot water, will then be afraid of his own bowl of innocent fresh water.
  • MoonDragon wrote: »
    For 2011-2012, I had just received dividend due to a breach of negociation/contract with a client abroad.

    If you only paid a dividend in 2011-12 then you would indeed not have made any NI payments in that tax year, as NI is solely based on your level of salary. Your accountant seems to have not provided you with particularly appropriate advice, as, if you do not have other earnings elsewhere, it is usually best to pay yourself a salary from your limited company of at least the Lower Earnings Limit, before making dividend payments.

    If you are the sole director of the company, it is your choice as to how you take an income from the company, and this is not affected by whether you are working for a client abroad or a client in the UK, if all of the income is going through the limited company.
    November 2007 £570k 25 years - MF March 2033
    September 2012 £405k 20 years - MF January 2032.
    January 2015 £301k 16 years - MF January 2030
    January 2020 £231k 10 years - MF January 2030
    Mortgage Free Goal: In progress!
    June 2020: Outstanding mortgage £75,211 (£222,414 mortgage offset by £147,203 cashpool)
    August 2020: Outstanding mortgage £59,262 (£134,598 mortgage offset by £75,280 cashpool)
    Sept 2020: Outstanding mortgage £56,682 (£131,760 mortgage offset by £75,022 cashpoool)
    April 2021: Outstanding mortgage £17,278 (£64,646 mortgage offset by £47,313 cashpool)
  • If you are the sole director of the company, it is your choice as to how you take an income from the company, and this is not affected by whether you are working for a client abroad or a client in the UK, if all of the income is going through the limited company.

    What would be the case if I use another account?
    A cat who's been sprayed with hot water, will then be afraid of his own bowl of innocent fresh water.
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