Jennifer Adams outlines the National Insurance contributions position for taxpayers who are both employed and self-employed, and the impact of rule changes from 6 April 2015.
In a report issued in August 2014 by the Office of National Statistics (‘Self-employed workers in the UK’), it was calculated that approximately 15 per cent of those currently working in the UK are self-employed. As well as those 4.6 million people, an additional 356,000 are employed but also have a second job in which they are self-employed (e.g. doctors who work for the NHS but who also have their own self-employed private practice).
Being both employed and self-employed can result in the overpayment of National Insurance contributions (NIC), given that Class 1 NIC is paid on employed earnings, and Class 2 and/or Class 4 NIC is levied on self-employed earnings.
The annual maximum NIC payable by any taxpayer whatever the source of earnings is 53 weeks at the standard primary (employee) Class 1 contribution rate between the earnings threshold and the upper earnings limit. For 2014/15, this amount is £4,146.72.
Calculating maximum NICs
Class 1 and Class 2 maximum - Where a taxpayer is both employed and self-employed, it has been possible to submit a claim for deferment of Class 2 NIC, should it be estimated that earnings from employment for a particular year would be likely to exceed the maximum NIC limit. A deferment claim ‘delays’ the payment of NIC until the end of year figures are known. Application is made on an annual basis.
The rules for the calculation are not to be found in any tax legislation, but rather in the Social Security (Contributions) Regulations 2001, SI 2001/1004, reg 21 (as substituted by Social Security (Contributions (Amendment) Regulations 2003, SI 2003/193).
Class 1, 2 and 4 maximum - Calculation difficulties arise where there is a mix of earnings such that the Class 1 limit is not exceeded separately, but by paying NIC based on total earnings the limit will be exceeded and a refund due.
Calculation process
Where the full range of NIC payments are due, reg 100(1) of the 2001 Regulations applies, which details a nine-step process of calculation to ascertain the amount of Class 4 NIC payable.
The calculation starts from the same basis, namely the calculation of the theoretical maximum ‘main rate’. This figure is calculated as being the maximum Class 2 and Class 4 NIC for the tax year taking contributions to the upper profits limit. For 2014/15, this figure is £3,383.95, calculated as follows:
Step 1 and 2: Class 4 maximum on full profit band £3,051.81
9% x (£41,865 - £7,956)
Step 3: Class 2 maximum - 53 weeks x £2.75 £ 145.75
Theoretical maximum NIC ‘main rate’ £3,197.56
At Step 4 of the calculation the total amount of Class 1 and Class 2 NIC already paid is deducted from the ‘main rate’ amount. The legislation then categorises the resultant figure into three ‘cases’; which one to use is dependent upon the amount and mix of income.
Where the deduction at Step 4 results in a negative figure (in practice when employment income subject to Class 1 NIC is in excess of the ‘main rate’), the profit in excess of the Class 4 NIC lower profits limit is charged not at the standard 9% rate, but at the uncapped 2% rate.
A positive resultant figure will mean further steps in a more complicated calculation are required.
Detailed worked examples can be found in the HMRC National Insurance manual at paragraph NIM24175 (www.hmrc.gov.uk/manuals/nimmanual/nim24175.htm).
Reclaiming overpaid Class 4 NIC
When the calculation has been finalised and it is found that there has been an overpayment of Class 4 NIC, a refund can be claimed using form CA5610 (which is available online). For the 2014/15 tax year, the earliest date that this form can be submitted is 1 February 2016.
Normally, there is a six-year time limit for claiming a refund on overpaid NIC, but there is no deadline for reclaiming excess contributions where a taxpayer has been both employed and self-employed.
If the taxpayer has not previously submitted a deferment application, payment of all NICs must be made, and then a claim for refund will be required.
Deferment deadlines
The deadline date for deferment of Class 2 NIC for 2014/15 is at the end of the tax year on 5 April 2015. Deferment is not possible for prior tax years and only repayment claims are acceptable.
Application to defer Class 2 NIC and/or Class 4 NIC is via completion of form CA72B. There is no deadline for deferment of Class 4 NIC, but it is only possible if the full amount of Class 4 NIC remains payable at the date of submission or the tax year is under enquiry.
Future reclaims
From April 2015, most self-employed people will be paying Class 2 NIC via self-assessment with any income tax and Class 4 NIC due; thus payment will be in one lump sum on 31 January following the year of assessment.
The planned changes mean that deferment claims will no longer be required and any submitted post 1 January 2015 are not being processed. HMRC have sent letters to taxpayers who usually submit deferment applications every year to advise them that no further applications will be accepted.
From 6 April 2015, HMRC will be using the information provided on the self-assessment return, together with information already held, to determine the amount of any Class 2 and/or Class 4 NIC payable. A breakdown of each class payment will be given on the self-assessment tax calculation on issue.
Practical Tip:
One benefit of HMRC’s digital strategy is that submission of NIC deferment forms will no longer be required as from 6 April 2015. However, the difficulties in calculation of NIC overpayment, and in particular Class 4 NIC, will remain for those who are both employed and self-employed. Although HMRC have announced that they will supply a ‘breakdown of each class payment’, this will not be a calculation of sufficient detail that taxpayers who are employed and self-employed can be certain the correct amount is being charged. Such information will still need to be requested.
