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Class 4 NIC Trading Losses and Checking the Software!

Is it possible that loss making clients have overpaid Class 4 National Insurance Contributions (NIC)? Or more importantly, have they not obtained a repayment they may be due?

Class 4 NIC rates increased from 6 April 2011 and this helps highlight the ‘tax’ planning opportunity of the offset of trading losses against the Class 4 NIC liability. This can be of particular importance with regard to seasonal businesses and/or those with fluctuating profits, such as the farming industry.

The Current Rates of Class 4 NIC

2010/11 2011/12

Class 4 lower profits limit £5,715 per year £7,225 per year
Class 4 upper profits limit £43,875 per year £42,475 per year
Class 4 rate between lower profits 8% 9%
limit and upper profits limit
Class 4 rate above upper profits limit 1% 2%

The above table highlights serious concerns over the increased ‘cost’ of Class 4 NIC.

It should be noted that the Class 4 and trading loss interaction is something that not all software packages charged with the task of producing tax returns identify. It is therefore worthwhile checking all loss making clients with Class 4 liability.

A repayment can arise when the taxpayer has claimed loss relief against non-trading income or capital gains. Losses not used for Class 4 NIC purposes are carried forward and used against the first available profits liable to Class 4 from the same trade (as mirrored in the loss provision for income tax).

The losses available to set off for Class 4 purposes only are shown on the Tax Return Self-Employment (full) pages at box 101. Those taxpayers who would otherwise complete the Self-Employment (short) pages are unable to do so if they wish to claim this relief as there is no similar box on the short Self-Employment pages.

Loss Memorandum

A loss memorandum must be kept for unused losses to be carried forward against future profits and also how losses have been used against Class 4 NIC liabilities. A note of how Class 4 NIC losses have been utilised should be made in the additional information box on the Tax Return to keep HMRC informed.

With any loss making individual, it is essential that a loss memorandum is kept to ensure that the tax losses are claimed both correctly and efficiently, e.g. loss carried back, carried forward, offset against current year or offset against capital gains tax (CGT). It is important to control any unclaimed losses. There is another loss memorandum to keep, and that is for Class 4 NIC.

Practical Tax Tip

The increased cost of Class 4 NIC may push many unincorporated businesses into the ‘arms’ of a limited company, where the profits may be withdrawn by way of a dividend. Moving from unincorporated to incorporated is now even more attractive following the reduction in the small companies’ rate of corporation tax from 21% to 20% from 31 March 2011.

By Julie Butler

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