Class 1/2/4 NIC adjustment

Is HMRC's adjustment correct?

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We have submitted a client's 17/18 return and HMRC have provided a revised tax computation. The facts are as follows;

Client was employed and self-employed (trading LLP member) throughout the year, has been the situation for a few years. Employment income and LLP profit allocation both above £50k. HMRC online showed £88.35 Class 2 and £36,836 Class 1 NIC income between PT and UEL. 

On our software we entered the full £148.20 Class 2 and the £36,836 Class 1 amount. The software calculated the reduced Class 4 amount & agreed to a manual calc. My understanding is that this is the correct method.

HMRC's computation shows the £88.35 Class 2 and a different reduced Class 4 amount. Client is c.£100 better off by HMRC's computation. Two colleagues have spoken with HMRC and have been assured this is correct.

I can't see anything in the legislation which allows for a reduction in Class 2. Before I put the matter in writing to HMRC, could anyone please confirm the correct treatment and if possible provide a link to legislation / HMRC manuals?

tldr; My understanding is that the full year Class 2 should be paid, and Class 4 adjustment made based on that and Class 1 paid. HMRC disagree. Who is right?

 

 

Replies (8)

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By Duggimon
15th Nov 2018 16:52

I wouldn't trust HMRC to work out the correct NI liability on £5,000 employment income with no other sources.

Class 2 is payable at £2.85 a week for each week you're self employed in 2017/18 and afaik that doesn't ever change as a result of paying class 1.

Given they've mucked that up I think the rest of their calculation can probably go in the bin too.

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By SXGuy
16th Nov 2018 06:21

Had the same last week. Check your start dates to make sure.

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By Wanderer
16th Nov 2018 08:33

Contrary to the above I think HMRC may be right here. I don't profess to be fully conversant with the rules however I have seen this before with high employment + self employment income. Here's a reference from Tolleys which mentions "and may result in a reduced or nil liability for Class 2 NICs".

23.9 Annual Maxima
There is an “annual maximum” of contributions applying to any individual for a “contribution year”. The contribution year is the same as the tax year. These “annual maxima” rules apply where the earner either has two jobs (and is therefore paying Class 1 NICs twice), or he is both employed and self-employed (and liable to Classes 1, 2 and 4).
If an individual has substantial earnings and profits as both an employee and as a self employed individual, this could add up to a sizeable amount of NIC each
year. A similar issue could arise if an individual has two jobs. There is therefore a maximum cap which applies each tax year and any excess over this amount will
be refunded. This maximum amount is there essentially to ensure that an individual with two or more employments, or an employment and self employment, does not pay more NICs than an individual with one source of income, but instead pays the same as if the incomes had been combined.
The maximum amount is not a fixed amount and will vary according to the combination of employments and self employments as well as the amounts earned. There are 2 tests. “Test 1” looks at Classes 1 and 2 and may result in a reduced or nil liability for Class 2 NICs. If appropriate there may be a refund of Class 1 NICs. “Test 2” may result in a reduced amount of Class 4 contributions payable.
For the 2015/16 tax year onwards, where relevant HMRC will calculate the annual maxima automatically, and determine the correct amount of Class 2 and Class 4
NIC payable, notifying this amount to the individual.
The annual maxima rules are contained in Statutory Instrument 2001/1004 Regulations 21 and 100 within the NIC section of the Tolley Yellow Handbooks
(book 3).

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By Paul D Utherone
16th Nov 2018 09:25

You probably need to understand why HMRC have C2NIC as only 31 weeks and not 52 if they were a partner for the whole year, and have been for years

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RLI
By lionofludesch
16th Nov 2018 09:33

It's ages since I did one of these but is there not a Class 1+2 maximum and a separate Class 1+2+4 maximum ?

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By Duggimon
16th Nov 2018 10:01

I stand corrected, I've literally never heard of this but there is indeed a level of employment income where class 2 NIC is restricted, as referenced by Wanderer.

Thanks!

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By IslingtonAccountant
16th Nov 2018 17:37

Thanks for this everyone, Wanderer especially - I didn't think of Test 1. (We agree with HMRC on the class 4 reduction based on Test 2.) Sadly, the results of Test 1 with either our figures or HMRC's doesn't give any basis for a Class 2 reduction.

Looks like its going to have to be a letter and a 6 week wait!

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Replying to IslingtonAccountant:
RLI
By lionofludesch
16th Nov 2018 18:26

You say your client is £100 better off by HMRC's calculation ?

I expect they'll be right.

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