NI Questions

broddr

Hi everyone,

I am after a little advice regarding NI. Hopefully one of you will know the answers to my questions and be able to help me out.

I am self employed and really confused about the NI situation.

The main question is this:

Are secondary class 1 NI contributions taxable?

I am pretty clear (I think!) on class 2 and class 4 contributions. Although I find it increasingly annoying that I have to pay income tax on the national insurance contributions and I have to pay national insurance contributions on the income tax I pay.

How can my NI contributions be classed as income when I never see that money? It is ridiculous.

Anyway, I am currently looking to employ my first member of staff and am now getting bogged down in all the extras that go along with employing people.

I understand that I have to operate PAYE for my staff and deduct their class 1 NICs and income tax from their wages.

I also have to pay the "secondary class 1 contribution" for each member of staff.
I have to pay a percentage of my employee's wage to the HMRC over and above what the employee is paying.

But do I also have to class this secondary contribution as my income?

As I would not be paying the contribution if I did not have staff, it seems to me that it would be a non-taxable expense in the same way as the employee's wage would be.

It seems even stranger if it is classed as income and not an expense as then I would be paying income tax on that figure. I would also be paying my own NI contributions on the amount I am paying in NI contributions. Confusing eh?

Anybody got any clues?

Thanks in advance,
Broddr.

Elaine_Wilson

I am a bit confused by your question so apologies if I miss the point.

Your class 2 contributions are a personal expense not a business expense (although the liability arises as a consequence of you being self employed). They have to be paid out of after tax income in the same way as all other personal expenses, such as holidays, food and council tax.

The class 4 contributions and income tax are also a personal expense. These are slightly different in that they are calculated by reference to your net business income, i.e. turnover less business expenses. The situation is exactly the same as for employees except, of course, that they pay class 1 NIC instead.

So I can't understand how you think national insurance contributionsare classed as income.

But onto secondary class 1 contributions. You are correct that they are treated in the same way as the wage paid to the employee. They therefore reduce your business profits (as these are a business expense) which means your tax and national insurance is calculated on a lowewr figure than they would have been had you not employed anyone.

Any help?

broddr

Thanks for the reply,

sorry I may not have made myself as clear as I could have done, I find this stuff hard enough to think about, never mind talk about!!

What I meant by the national insurance classed as income bit is (takes a deep breath)

Both NI and income tax are calculated on my income.
Two separate calculations.

Let's say my gross income is £10,000 for simplicity's sake.

Income tax is calculated as a percentage of £10,000.
NI is also calculated as a percentage of £10,000.

Say my class 4 NI is £100 of that £10,000, I still have to include that £100 in the calculation for income tax.

So, in reality, I am paying income tax on the money I have to pay HMRC for National insurance and vice versa.
I believe that that £100 I am paying for NI should not be classed as income as I never see a penny of it, and I shouldn't have to pay NI on the money I have to pay HMRC in income tax.

It is, in effect, a tax on tax.

Does that make any sense?
Sorry, if it doesn't.

That's all academic anyway, it is not a very fair method of taxation but there is nothing I can do about it.

My main question was about the secondary employers contribution for class 1 NICs.

So what you are saying is that I can put the secondary employers contribution class 1 NICs through my accounts as a legitimate business expense and therefore not pay tax on that sum?

So I can simply put the whole staff wage through, including my employers contribution, as a business expense?

i.e.

employee wage
employee's primary class 1 NIC
employee's income tax
employers secondary class 1 NIC

All four of the above are classed as business expenses and un-taxable?

Sorry if I am appearing stupid here but this is my first foray into anything like this. While it seems general information is available all over the net, such as tax rates, deadlines etc. things like this seem to me to be some kind of state secret.

Thanks for your reply and advice,
Broddr.

mrkbrrws

Your staff costs are calculated as either:-

Gross wages +
Employer's NICs

or

Net wages +
PAYE Income Tax, Employee's and Employer's NICs payable (i.e. your payments due to HMRC)

Both methods come to the same result and this means that your employer's (secondary) National Insurance Contributions are deductible for tax purposes.

Elaine_Wilson

Very clearly put, mrkbrrws.

It seems a difficult concept for an employer to grasp that, as far as their business in concerned, the wage cost is the gross pay. The fact that some is paid elsewhere doesn't alter the nature of the payment from the employers view. Employers sometimes have to deduct student loan repayments, maintenance payments to the Child Support agency or debts under court orders. These are personal liabilities of the employees.

And to broddr, don't worry about asking these questions. I find it quite useful to know what areas business owners have difficulty with. It helps me to provide better answers to their questions. It's a bit like simple arithmetic. I can't remember not being able to add or multiply two numbers together though there was obviously a time when I was unable to. So I can't remember how I learned which makes it difficult to help someone else learn.