Class 2 NICs, am I "Self Employed"?

nd85_2

Both my wife and I are in full time permanent employment thus pay income tax and Class 1 NIC via PAYE.

We do the occasional bit of freelance work together up to £2-3k a year. This tax year (2013/14) I decided to formalise our freelance work into a partnership (profit and liability split 50:50), with a view to this being the most tax efficient way, since I am a higher rate tax payer and she is not. Previously I would declare it all under my name, and ended up paying 40% income tax, even though it's shared work.

I have filled in a Self Assessment return for the last couple of years, to declare the extra freelance earnings and claim back higher rate relief on my pension, but I have never considered myself "self employed".

Since filing this partnership with HMRC they have started charging us both Class 2 NICs at £2.70/week (£280.80/yr for the two of us). Obviously this pretty much negates the tax benefit of having the partnership in the first place given the low turnover. I opened the partnership by writing to HMRC with the partnership paperwork and asking them to enroll both of us so that we can submit a self-assessment form at the end of the tax year.

Should we be registered as "self employed" with HMRC and should we be paying Class 2 NICs? I thought we'd just be paying income tax and Class 4 NIC on our profits at the end of the tax year, and not this weekly charge for the privilege of being being "self employed". Did this mistake come from me asking them to enroll us for self-assessment?

I think what I'm looking for is clarification that we don't need to be paying this, and how I should set about rectifying the matter. A letter to HMRC with what appropriate wording — we aren't self-employed, but we operate a partnership under which we will declare additional earnings not under PAYE.

Any help greatly appreciated.

zygurat789

nd85 wrote: »

Both my wife and I are in full time permanent employment thus pay income tax and Class 1 NIC via PAYE.

We do the occasional bit of freelance work together up to £2-3k a year. This tax year (2013/14) I decided to formalise our freelance work into a partnership (profit and liability split 50:50), with a view to this being the most tax efficient way, since I am a higher rate tax payer and she is not. Previously I would declare it all under my name, and ended up paying 40% income tax, even though it's shared work.

I have filled in a Self Assessment return for the last couple of years, to declare the extra freelance earnings and claim back higher rate relief on my pension, but I have never considered myself "self employed".

Since filing this partnership with HMRC they have started charging us both Class 2 NICs at £2.70/week (£280.80/yr for the two of us). Obviously this pretty much negates the tax benefit of having the partnership in the first place given the low turnover. I opened the partnership by writing to HMRC with the partnership paperwork and asking them to enroll both of us so that we can submit a self-assessment form at the end of the tax year.

Should we be registered as "self employed" with HMRC and should we be paying Class 2 NICs? I thought we'd just be paying income tax and Class 4 NIC on our profits at the end of the tax year, and not this weekly charge for the privilege of being being "self employed". Did this mistake come from me asking them to enroll us for self-assessment?

I think what I'm looking for is clarification that we don't need to be paying this, and how I should set about rectifying the matter. A letter to HMRC with what appropriate wording — we aren't self-employed, but we operate a partnership under which we will declare additional earnings not under PAYE.

Any help greatly appreciated.

You have self employed income.
This means you may have to pay on it Income tax, class 2 & 4 NIC if the figures are large enough.
This has been the situation since you rendered your first invoice.

Your mistake was to apportion the partnership profits 50:50. You are entitled to divide them how you choose ie none to the higher rate tax payer and 100% to the basic rate tax payer.
Next you may apply for exception to Class 2 NIC if your self employed income is less than £5,725 in 2013/14.

nd85_2

Thanks zygurat789.

This means you may have to pay on it Income tax, class 2 & 4 NIC if the figures are large enough.

I understand this, and fully expect to pay this on the income itself, but I find it hard to understand that we both need to pay £2.70 a week "just in case" we have any additional income this year. Does everyone who submits any kind of additional income have to pay Class 2 at £2.70 a week? I don't know where I went wrong in signing myself up to this!

Your mistake was to apportion the partnership profits 50:50. You are entitled to divide them how you choose ie none to the higher rate tax payer and 100% to the basic rate tax payer.

Maybe, but I felt this would be immoral, given our input is roughly equal. Isn't this more akin to evasion than avoidance? I can re-apportion the profits by amending the partnership agreement, that shouldn't be a problem.

Next you may apply for exception to Class 2 NIC if your self employed income is less than £5,725 in 2013/14.

It almost certainly will be, especially leaving the partnership at 50:50... that means that we could invoice less £11,450 (£5,725 each) and we'd remain exempt from Class 2 NICs?

Would I need to apply for exemption now, or would this be reclaimed during Self Assessment at year end?

zygurat789

nd85 wrote: »

Thanks zygurat789.



I understand this, and fully expect to pay this on the income itself, but I find it hard to understand that we both need to pay £2.70 a week "just in case" we have any additional income this year. Does everyone who submits any kind of additional income have to pay Class 2 at £2.70 a week? I don't know where I went wrong in signing myself up to this!



Maybe, but I felt this would be immoral, given our input is roughly equal. Isn't this more akin to evasion than avoidance? I can re-apportion the profits by amending the partnership agreement, that shouldn't be a problem.



It almost certainly will be, especially leaving the partnership at 50:50... that means that we could invoice less £11,450 (£5,725 each) and we'd remain exempt from Class 2 NICs?

Would I need to apply for exemption now, or would this be reclaimed during Self Assessment at year end?

There is no such thing as tax avoidanec you are doing something which is legal or illegal.
Your partnership agreement, and you do not need a formal written agreement, should quote the law effectively profits may be divided between the partners as they see fit from time to time.

What you invoice is irrelevant for Class 2 NIC purposes, what is important is your net (taxable) profit and if you are not splitting profits 50:50 you may have to pay class 2 NIC on one income.This has nothing to do with self assessment and you should apply for exception now and ask them nicely about previous periods.

nomunnofun

nd85 wrote: »

Thanks zygurat789.

Maybe, but I felt this would be immoral, given our input is roughly equal. Isn't this more akin to evasion than avoidance? I can re-apportion the profits by amending the partnership agreement, that shouldn't be a problem.

Tax evasion is one thing - tax avoidance is another. Making the best use of a married couple's personal allowances and tax rate bands is simply good tax planning.

zygurat789

nomunnofun wrote: »

Tax evasion is one thing - tax avoidance is another. Making the best use of a married couple's personal allowances and tax rate bands is simply good tax planning.

Could you define tax avoidance.

nd85_2

what is important is your net (taxable) profit and if you are not splitting profits 50:50 you may have to pay class 2 NIC on one income

Could you clarify what you mean by this please? What bearing does the ratio have on whether Class 2 NICs are due on one, both or neither income?

zygurat789

nd85 wrote: »

Could you clarify what you mean by this please? What bearing does the ratio have on whether Class 2 NICs are due on one, both or neither income?

You were splitting profits 50:50, I was suggesting that this might not be the best way to do it.

There are two of you in partnership, profits are £5,625.
Do you split profits £5274 & £352 Thus paying 40% but preserving the class2 nic exception or do you avoid paying 40% and pay class 2?

nomunnofun

nd85 wrote: »

Could you clarify what you mean by this please? What bearing does the ratio have on whether Class 2 NICs are due on one, both or neither income?

Of course, as you are a higher rate taxpayer, there is also the possibility of applying for deferment (as opposed to small earnings exception) of Class 2 and/or Class 4 NIC.

http://www.hmrc.gov.uk/forms/ca72b.pdf

Savvy_Sue

nd85 wrote: »

Would I need to apply for exemption now, or would this be reclaimed during Self Assessment at year end?

Best to apply for it now: you usually can get these NICs back if you have paid any in error before the Certificate of Exemption arrives, but as it usually takes them a while to get the DDs set up then you can probably pre-empt this.