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Class 4 NIC and Losses: Get the details right

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Profit for NIC purposes can differ from the profits chargeable to income tax, due to the set-off of losses and deductions such as partnership interest, as Jane Wanless explains.

26th Nov 2021
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Class 4 national insurance contributions (NIC) are payable on profits from self-employment  as a sole trader or a partner. However, the use of losses and other costs including interest on loans for partnership capital can confuse the issue.

Losses

One of the most common causes of such a difference is the use of losses.

Where a trader also has an income taxed under PAYE, a business loss can be claimed against the PAYE source under ITA 2007 s 64, giving a refund of PAYE tax paid. Alternatively, as the claim is against general income, it may reduce the tax due on rental or other income. Depending on the amount of loss and the amount of other income, the trading loss could be partly or fully used up, leaving reduced or no losses available to carry forward for offset against future profits.

Similarly, losses in the early years of trading can be claimed under ITA 2007 s72 and set against non-trading income, such as PAYE earnings, investment and other income.

In both of these situations, the losses are utilised for income tax, but unless the income against which the losses are claimed arise from a separate business operated by the trader, they are not used for NIC purposes. The losses would therefore remain available for carry forward and offset against future profits for NIC purposes. See HMRC example in NIC manual at NIM24615.

Should a loss arise in respect of employment income (which is very rare), although it may be possible to claim income tax relief against trading income, such a loss cannot be claimed for National Insurance purposes. 

Records are vital

As the losses which are carried forward for income tax and for NIC can vary, it is necessary to keep a record of the losses claimed, and the amounts not used for class 4 NIC purposes, which therefore remain available for carry forward.

Some tax return software has a facility for this, under “adjustments for NIC” or similar. If this is not available, an alternative record should be maintained.

Partnerships

While the starting point for the calculation of a partner’s NIC liability is the adjusted profit as shown on the partnership tax return, each partner can make their own loss claim. As a result, partners may have losses available for NIC purposes that differ from the available income tax losses, on a similar basis to a sole trader.

A partner may also be able to obtain relief for payments made in connection with the trade. Where a partner pays interest on a loan used to buy into a partnership or to provide money for the partnership, income tax relief is available under ICTA 88 s353.

On a similar basis, a partner can obtain relief from class 4 NIC under SSCBA 1992 Sch2 para3 (5) when the monies borrowed are used for the purposes of the trade or to provide plant and machinery for partnership use (so no relief is available if a partnership share is bought from another partner).  Under the same legislation, partners are also able to claim relief from Class 4 NIC in respect of annuities or annual payments to the extent that they are incurred for the purposes of the trade and have not been allowed in calculating the partnership’s trading profit.

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Replies (7)

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RLI
By lionofludesch
26th Nov 2021 16:08

Failing to realise that Class 4 losses are a separate claim is a very, very common error.

Thanks (0)
Replying to lionofludesch:
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By Paul Crowley
26th Nov 2021 16:14

+1
Do not come across the problem so much now

Thanks (1)
Replying to Paul Crowley:
RLI
By lionofludesch
26th Nov 2021 16:26

I don't think it was ever common. The most likely scenario was a start late in the tax year and a big Capital Allowances claim.

Maybe Covid will throw up a few.

It's very rare that you can do anything with them other than carry forward.

Thanks (2)
Replying to lionofludesch:
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By Paul Crowley
26th Nov 2021 18:21

Setting against other income (PAYE) and carry back 3 years in the first year tended to be the ones I came across

Thanks (0)
Replying to Paul Crowley:
RLI
By lionofludesch
26th Nov 2021 18:35

Paul Crowley wrote:

Setting against other income (PAYE) and carry back 3 years in the first year tended to be the ones I came across

FA 1978 s 30, if I remember right. Worked for Income Tax losses.

But what about your Class 4 ?

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Replying to lionofludesch:
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By Paul Crowley
27th Nov 2021 15:06

Class 4 losses carried forward needed to be changed in the software
Something that tends to get forgotten
I think that is the point of the article and a good reminder in my opinion

Thanks (1)
paddle steamer
By DJKL
29th Nov 2021 13:37

The white box note was your friend, we for years set our trading losses against other income (usually partnership rental profits) and our class IV losses unused were pretty large (circa £150,000 per partner) so each year I carried a note in the white box re quantum. (These days academic as no trade any more.)

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