National Insurance Contributions

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National Insurance Contributions
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Example 1
Jimmy is a self-employed builder and Jenny is a
self-employed consultant. Their Schedule D Case I
profits for 2006-07 are respectively 25,000 and
50,000. Class 4 NIC liabilities for 2006-07
are as follows
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Example 2
Simone Limited has one employee who is paid
40,000 per year, and was provided with the
following taxable benefits during 2006-07
Company motor car 6,400 Car
fuel 4,320 Living accommodation _1,800 12,520

Calculate NIC liabilities, both Class 1 and Class
1A
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BUSINESS TAX PLANNINGTo Incorporate or Not
Advantages of Unincorporated format-

• NIC Classes 2 4 payable by the proprietor is
  less than Class 1 contributions which would be
  payable if he was a director of a company
• Loss relief may be set against other income,
  especially in the first four years of business
• Less formalities and less bureaucracy

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BUSINESS TAX PLANNINGTo Incorporate or Not
Advantages of Incorporated format-

• Savings in higher rate income tax can be achieved
  by retaining profits in the company
• Provided the company has profits above a certain
  threshold, but
• Between 2002 2006 the 0 starting rate of CT
  enabled (very) small companies to save tax as
  well

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Tax Differentials Company v. Sole Trader
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BUSINESS TAX PLANNINGTo Incorporate or Not
Disadvantages of Incorporated format-

• It is difficult to extract funds from a company
  into the hands of the individuals who run it
  without incurring a tax liability
• earnings taxed at 40 above basic rate band
• dividends taxed at Schedule F upper rate
• capital gains (after taper relief) taxed as top
  slice of income
• close companies pay CT on loans to participators

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Tax-Efficient Extraction of Funds from a Company
For a director/shareholder

• who is a basic rate taxpayer
• a dividend will avoid NIC liability, and
• there is no further income tax liability (the
  tax credit is recoverable)
• who is a higher rate taxpayer
• a salary/bonus can be used to finance pension
  payments which attract tax relief at the higher
  rate,
• 1 liability to employees NIC above the upper
  earnings limit,
• employers NIC is allowable for corporation tax

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Remuneration v. Dividends

• HR income tax can be avoided by retaining profits
  in a company.
• Rolled up profits may be taken as a capital gain
• Advantages of dividends
• tax-free if they fall within the basic rate band
• taxed at ¼ of net on a top rate taxpayer
• no NIC
• Advantages of remuneration (earnings)
• allowable for corporation tax
• employees NIC capped at 1 above UEL
• can be used to fund pension payments

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Example
Final corporation tax is 10,000 _at_ 19 1,900
(30,000 - 10,000) _at_ 15.833 3,166 5,066
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All profits distributed