February 2011 Q&A
National Insurance Contributions for the self-employed
Q: I recently applied for a state pension forecast and have had a response showing that I have already contributed enough to get my state pension. Does this mean that I can stop paying National Insurance on my self-employed earnings?
A: Unfortunately, just because you have contributed enough National Insurance to qualify for your state pension, this does not mean that you can stop paying National insurance if you have not yet reached pensionable age.
There are two classes of National Insurance that are applicable to self-employed individuals, Class II which is sometimes called the 'weekly stamp' and Class IV which is levied on profits if they exceed a certain amount.
Class II National Insurance Contributions must be paid until the earlier of the date on which you cease to trade, or the day on which you reach the qualifying age for state pension. For those individuals who have a low income, it is possible to apply for a small earnings exemption from Class II.
Class IV National Insurance Contributions are computed according to the net profit each year on your self assessment tax return. The final liability for Class IV Contributions falls in the tax year you cease to trade, or the year you reach the qualifying age for state pension.
National Insurance is a complex area of legislation, particularly for individuals who are required to pay more than one class. If you have any queries concerning your liability to pay National Insurance, please contact TaxAssist Accountants.
Meals provided for employees
Q: I own a gift shop and we are now opening longer hours. On certain days this means opening late at night and we are now opening on Sundays too. I need my staff to do additional hours during this busy period and want to pay for their meals when they are working longer hours than usual. If I do this, will they have to pay tax on the cost of me providing the meals?
A: If you offer free or subsidised meals at your business premises for your staff, this can be done free of tax and National Insurance, but only if the offer is made to all employees, including directors and part-time workers. If the offer is only made to certain employees, the exemption does not apply and then the cost of every meal represents a chargeable benefit in kind. This must then be reported on the employer year end P11D forms and tax and National Insurance would be due on the cost of providing the food and drink.
It is important to note that the offer has to be available for all employees, but if any staff decline the offer, it does not mean that the exemption is lost. The meals do not have to be given to all employees at the same time, they just all need to have the opportunity to take them. You should therefore consider the different working patterns of your staff and perhaps offer the meals at various times on different days of the week to ensure that all staff are included.
If the meals do not qualify for the exemption, you could, as the employer, offer to settle the tax and National Insurance liabilities on behalf of the staff, however this would increase the cost to you considerably.
Q: I have been self-employed for a few years and due to the success of my business, I am now considering incorporating so I can trade through a limited company. I have used my current trading name since I first started and want to use the same name for my limited company. Will I be able to do this and can I protect the business name?
A: One way of protecting the name is to set up a dormant limited company, which you can trade through at a later date when you decide to incorporate your business. Although you would not be using the company to run your business at first, it would still be subject to the same filing requirements with regard to an annual return and accounts, but would be classed as dormant if no trading transactions have taken place.
Simplified dormant company accounts must be submitted to Companies House each year using form AA02. HMRC should also be informed of the company's dormant status, using form CT41G (dormant company insert).
Once you decide to bring your business into the dormant company, all the assets and trade should be transferred in and Companies House and the Revenue must be notified of the change in status for the company. Form CT41G (new company details) should be completed and filed with the Revenue in order that notices to file corporation tax returns can be issued.
If at some point during the company's life trade ceases for any reason, the company may be put back into a dormant state to avoid the need for full accounts and tax returns to be submitted to the Revenue, however abbreviated accounts would still be required by Companies House.
It is important to remember that the timing of an incorporation, or indeed cessation of a business can be crucial from a tax point of view and therefore it is a good idea to seek professional advice before you stop or start trading, in order that it can be managed in the most tax efficient way.
Lloyd Stubbs specialises in managing tax and accountancy affairs for small business owners and can be contacted by phone or email
Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.