Property businesses, Selling a home, Pay class 2 NIC early

The British are often said to be obsessed with the value of their homes. Last week we examined two ways in which the government is seeking to extract the maximum amount of tax on that value on the disposal of UK properties. We also explained why it may benefit your clients to pay their class 2 NIC in December rather than in January.

What follows is just an extract from last week’s tax tips sent out to all subscribers on Thursday morning. Please also note the caveats in the box on the right.

Pay class 2 NIC early

Paying Class 2 NIC allows the individual to qualify for certain contribution-based state benefits including; state retirement pension, maternity allowance, employment support allowance (ESA) and job seekers allowance (JSA). Note there are non-contribution versions of JSA and ESA.

To be eligible to receive the benefit the taxpayer must have paid sufficient class 2 NIC for a specified period, which differs for each benefit. For ESA and JSA the claimant must have paid at least 50 weeks of NIC for both of last two tax years which ended before the beginning of the benefit year. The DWP benefit year starts on the first Sunday in January, not on 6 April, as you might expect.

If the taxpayer pays all his class 2 NIC for the 2015/16 in January 2017 (due date is 31 January 2017), he won’t have paid those contributions before the start of the benefit year which starts on 1 January 2017. This means he will have paid insufficient class 2 NIC for the tax year 2015/16, and won’t qualify for the contribution based ESA or JSA for in 2017. The claimant may have to apply for income-based JSA instead.

Child benefit and pensions, ATED and developers, Class 2 NIC mismatches

As an accountant you will be practised at pointing out tax traps to your clients, and helping them out of the holes they have fallen into. Last week we highlighted two tax traps; for parents who haven’t claimed child benefit, and property developers who haven’t claimed ATED relief. We also explained how mismatches between class 2 NIC and self-assessment occur, and how to resolve them.

What follows is an extract of just one of the 3 tax tips we shared with general practice accountant subscribers last week. Further details are in a box on the right.

Class 2 NIC mismatches

When the collection of class 2 NIC was transferred to the income tax SA system for 2015/16 onwards, most advisers assumed that the calculation of the class 2 liability would also be generated by the data included on the SA return. This is not the case.

HMRC continues to run two separate computer systems; SA for income taxreturns, and the NPS which contains class 2 NIC records. The liability for class 2 NIC is based on the NPS record, not on the information from SA returns.

Entries on the SA return do not update the taxpayer’s NPS record. Recording a commencement or cessation date for a self-employment on the SA return will not affect the liability for class 2 NIC. HMRC must be separately informed of that information.

However, data from the NPS is used to overwrite data from the SA return. For example, when the direct debit mechanism for paying class 2 NIC stopped in mid-2015, the taxpayer may have cancelled their direct debit. The NPS computer interpreted this as a cessation of self-employment, and transmitted this information to the SA computer. As a result the taxpayer has no class 2 NIC collected as part of his SA liability for 2015/16, although it continues to be due.

Check that your self-employed client has a class 2 NIC liability for 2015/16. Non-payment of class 2 NIC may affect the taxpayer’s eligibility for a state pension.