Paying the right Class of NIC - or (if legally possible) how to avoid it altogether!

Steve_General

Hi,

I'm in my early 50's and retired due to ill-health. I've paid my 30 years of NIC and so pay no NIC on a company pension I receive. Obviously I don't do any paid work but I'm fortunate enough to receive additional annual payments from my ex-employer which are linked to the commercial success of products which I co-invented when I worked there.

Unfortunately, my ex-employer seems to be as confused as I am as to whether NI should paid at all for these annuals awards (which are taxed as income), and if so, what Class they should be. Does anyone have any ideas?

Thanks, Steve

CLAPTON

30 years of NICs is not enough : after 2016 anyone retiring needs 35 years worth to gain the full state pension.

Pensions income doesn't get charged NI: nothing to do with how many years of NI contributions you have

Sorry I have no idea about your main question

xylophone

additional annual payments from my ex-employer which are linked to the commercial success of products which I co-invented when I worked there.

How are these payments described in the company accounts? Salary? Pension? Royalties?

jimmo

Steve_General wrote: »

... for these annuals awards (which are taxed as income), and if so, what Class they should be. Does anyone have any ideas?

Thanks, Steve

Did you mean taxed as employment income?

If so, and if you are happy that it is correctly taxed as employment income then National Insurance follows and is chargeable under Class 1.

http://www.hmrc.gov.uk/manuals/nimmanual/NIM02010.htm


Next you need to look at Earnings periods and, if you are paid once a year, the earnings period is one year.

http://www.hmrc.gov.uk/manuals/nimmanual/NIM08020.htm


Therefore if the annual payment is less than the primary threshold (52*149) £7,748 you will have no NI to pay.

If it is more than the primary threshold £7748 you will pay NI at 12% on the excess up to the upper earnings limit (52*797) £41,444 and you will pay 2 % on anythingg in excess of £41,444.

http://www.hmrc.gov.uk/rates/nic.htm

Steve_General

"30 years of NICs is not enough : after 2016 anyone retiring needs 35 years worth to gain the full state pension."

I did not know about this! Thanks for the insight and my apologies for not thanking you sooner.

Steve_General

xylophone wrote: »

How are these payments described in the company accounts? Salary? Pension? Royalties?

Hi Xylophone,

Can I first apologise for not responding sooner - some health issues got in the way.

All the inventorship payments are included in the Staff Costs (i.e. salaries - along with the current employees salaries - even though I and the 4 other co-inventors no longer work for the company) for the research activities of the organisation. They are not associated with the royalty income in the accounts, although there is a defined mechanism linking the size of the payout to the amount of royalties received. These inventorship payments are also listed as a contingent liability in the accounts.

BTW, my company pension is paid to me via a separate pension administration company.

Does any of this help?

Thanks anyway,

Steve

Steve_General

jimmo wrote: »

Did you mean taxed as employment income?

If so, and if you are happy that it is correctly taxed as employment income then National Insurance follows and is chargeable under Class 1.

Hi Jimmo,

Once again, my apologies for not replying sooner to your detailed response to my query.

To be honest, I'm not at all happy that its been treated as employment income for NIC - we all have to pay HMRC, but I'm not sure that PAYE is the right way to do so, either - as I am now retired.

BUt if I do have to pay NIC, should it be paid as Class 1 or Class 1A (as a taxable benefit)?

Thanks,

Steve

lijaloo

You say you retired due to ill health. Do you claim any state benefits? If so you may be receiving national insurance credits.

Steve_General

lijaloo wrote: »

You say you retired due to ill health. Do you claim any state benefits? If so you may be receiving national insurance credits.

My pension plus inventor payments mean that I'm above the maximum income limit for state benefits. Which in many ways means I am in a fortunate position. But also means that I don't get any NI credits.

jimmo

Steve_General wrote: »

To be honest, I'm not at all happy that its been treated as employment income for NIC - we all have to pay HMRC, but I'm not sure that PAYE is the right way to do so, either - as I am now retired.

BUt if I do have to pay NIC, should it be paid as Class 1 or Class 1A (as a taxable benefit)?

I was afraid you would say that. The tax logic is pretty straightforward. The payments are not royalties in your hands even though they may arise out of royalties your employer is entitled to.
See the 4th paragraph here.

http://www.hmrc.gov.uk/manuals/cgmanual/CG68290.htm


You receive money as a consequence of something you did during the course of your employment. Therefore it is employment income assessable to tax as such and subject to Class1 NIC.
See this for the basis of assessment.

http://www.hmrc.gov.uk/manuals/eimanual/EIM42220.htm

Class 1A, applies to benefits in kind., not to money payments.

http://www.hmrc.gov.uk/manuals/nimmanual/NIM13003.htm

http://www.hmrc.gov.uk/manuals/nimmanual/NIM13140.htm

Steve_General

jimmo wrote: »

The payments are not royalties in your hands even though they may arise out of royalties your employer is entitled to. You receive money as a consequence of something you did during the course of your employment. Therefore it is employment income assessable to tax as such and subject to Class1 NIC.

Once again Jimmo,

Thank You for your detailed answer. Its clear that I'm going to have to pay NI on my income - there just remains one conundrum.

When calculating my NIC, do I include my pension, which together with the patent award (PA) will take me over the £41,444 upper earnings limit, or do I just calculate NIC based on the patent award alone?

If I do the latter, then presumably the PA that is more than the primary threshold (£7748) I will pay NI at 12%.

But if I include my pension first (in the NI calculation of income, but which is not subject to NI) and then add my PA, then some of the PA it will fall into the 12% band and (crucially) some of the PA will fall into the 2% NIC band.

Hence the title. The question is, am I being logical, or is it just wishful thinking on my part - again?!

Steve