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Class 2 NI

sanity check

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client has two self employments

one has a profit £10k

one a loss of £4k

his net income is below the class 2 threshold, we've claculated no payment due, and taxfiler has also claculated nothign due

HMRC have amended the calculation stating trade 1 profits are over the threshold and class 2 is due

need a sanity to check as to who is correct here

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By SXGuy
11th Jan 2019 22:43

Did you tick to offset losses against other income when you completed the SA?

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to SXGuy
12th Jan 2019 09:22

yes of course

the self employment with the loss has the loss set against other income for the year

effectively they have nil income

is there somewhere else on taxfiler I should be enetering this?

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By SXGuy
to busacrun
12th Jan 2019 10:24

Not sure I don't use it. Only speculating. You got me wondering the issue as well now, but I'm not at work to run a test to see what happens using my software.

However reading hmrc guidance it does say class 2 ni is payable when "A Trade" reaches the threshold. I can't find anywhere that says anything about when you offset losses against profit to reduce tax liability. So perhaps, it is correct, since trade A did go over the threshold.

Someone else I'm sure will advise further

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By CTA
12th Jan 2019 13:35

My thoughts (probably worth what you’ve paid for them):

An individual has a liability to Class 2 NIC where they have relevant profits of or above the small profits threshold.

“Relevant profits” means profits, from the employment, in respect of which Class 4 contributions are payable under section 15 for the relevant tax year. (S.11 SSCBA 1992).

S.15 says:

(1)     Class 4 contributions shall be payable for any tax year in respect of all profits which—

(a)     are immediately derived from the carrying on or exercise of one or more trades, professions or vocations

(b)     are profits chargeable to income tax under Chapter 2 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 for the year of assessment corresponding to that tax year and

(c)     are not profits of a trade, profession or vocation carried on wholly outside the United Kingdom.

i.e. your £10k profit falls within s.15.

Relief is given for the £4k loss under Sch 2, Para 3 when calculating the amount due for Class 4 purposes. This relief does not extend to Class 2.

I believe HMRC to be correct - the relevant profits for Class 2 purposes are those under s.15, which to my reading exclude the £4k loss (dealt with under Sch 2, para 3).

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to CTA
12th Jan 2019 16:46

thanks for your reply

if relevant profits is the trigger per your example, then why is the net self employment profit not the basis for class 2?

if the client wrapped his two businesses into one there would be no liability at all

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By SXGuy
to busacrun
12th Jan 2019 19:51

On a side note, given the above, it appears you've lost some losses on the offset as well. Loss used would be better at reducing profit to class 4 threshold, with some c/Fwd.

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By perry23
12th Jan 2019 21:10

10k - 4k how close to 6k class 2 threshold 6025

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16th Jan 2019 11:26

Look at the +ve side. The client gets a years credit towards his state pension

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16th Jan 2019 11:25

Duplicate Sorry

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By towat
16th Jan 2019 12:03

Just combine the 2 trades into 1 set of accounts, maybe a bit extreme to save £148 but I would do it as a matter of principle.

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to towat
16th Jan 2019 13:06

What principle would that be?

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By Rweaver
to towat
16th Jan 2019 13:27

Is that the principle that says you can ignore the fact that there are two distinct trades? [HINT: that principle is a fiction of your imagination]

I assume the ‘o’ in your username is a typo?

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to Rweaver
16th Jan 2019 13:52

I declined (a better version of) that joke.

Maybe I knew it took one to make it.

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By towat
to Rweaver
16th Jan 2019 17:49

A bit offensive and uncalled for I didn’t realise this was that sort of group.

I always try to be professional and polite THOSE are my principles.

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16th Jan 2019 12:40

A loss is available to offset against for NIC purposes as well as IT - see HMRC NI manual at NIM24610.
If the loss for IT is not claimed against other trading income it is available to carry forward against future trading profits, even where the loss for IT is not carried forward.
For the self employed, Class 4 does not count towards state pension and other benefits, only the class 2 does.

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to Stargazer42
16th Jan 2019 13:27

Stargazer42 wrote:

A loss is available to offset against for NIC purposes as well as IT - see HMRC NI manual at NIM24610.

That refers to Class 4. The OP's query is about Class 2.
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By raycad
16th Jan 2019 16:15

As other posters have stated, Class 2, although now collected via the SA return, is calculated and payable entirely separately to the rules for Class 4. Calculations for Class 4 allow trading losses to be deducted, whether they be brought forward from the same trade, carried back from the same trade or sideways-relieved from a separate trade. None of this has any impact on Class 2.

I use Taxfiler and have replicated the scenario of a £10k loss on Trade 1 and a £4k loss on Trade 2. I elected to have the £4k offset against general income of 2017/18, which duly flows through in the IT and Class 4 calculations. The overall calculation shows Class 2 NICs payable of £148.20 so I can't understand how, in your client's case, no Class 2 has been calculated. I have been unable to duplicate such a scenario, unless of course the client is over the age of 65. (I assume yours isn't?!)

It has previously been reported (on this forum and elsewhere) that there have in the past been problems with Class 2 where the client had not previously been registered as having started in business and the return software then calculates no Class 2. But that doesn't appear to be the case here and in the replication exercise I undertook there was of course no registration for SA, as it was a pure "dummy run".

Anyway, in short, I believe HMRC's interpretation to be correct. Your "manual" Class 2 calculation using offsetting is wrong and if Taxfiler is also showing the same result then I can only suggest that you raise a query with Taxfiler. I've always found them to be very helpful.

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