Collection of Class 2 and 4 NIC through self assessment – continuing issues and future changes

Members are continuing to report that HMRC’s self assessment (SA) calculations for 2015/16 show, in a significant number of cases, incorrect figures for Class 2 and 4 national insurance contribution (NIC) liabilities. HMRC calculations for 2015/16 should be checked carefully.

 

The NIC liability is determined by the information held in NPS (HMRC’s National Insurance and PAYE system) and this overwrites any figures that an agent or taxpayer reports on an SA return, even if the return is correct. Entries on the SA return do not update NPS – commencements and cessations of self-employment must be reported separately. HMRC has been issuing amended calculations which do not agree with submitted returns.

 

What changed in 2015/16?

2015/16 was the first year for collection of Class 2 contributions through SA. Direct collection remains in place for certain groups:

 

  • Those working overseas and continuing to pay Class 2 NICs (eg, with EU A1 certificates, or voluntarily)
  • Examiners, moderators, invigilators and people who set exam questions
  • People who run a ‘business’ involving land and property
  • Ministers of religion who do not receive a large salary or stipend
  • Those non-resident but self-employed in the UK.

 

Direct debits for those not within one of these groups should have ceased in July 2015, when the 2014/15 Class 2 NIC liability was all paid (there have been some reports of this not happening).

 

The small earnings exception process for Class 2 NICs no longer exists. Instead HMRC tests the profit figure on the tax return against the Small Profits Threshold (which is not pro-rated for short accounting periods). There is a tick box on the tax return for those taxpayers who wish to opt to pay Class 2 voluntarily to maintain their NIC record.

 

The deferment process for those with income from employment and self-employment also ceased in 2015. HMRC now uses the information on NPS to calculate the Class 4 NIC contributions due, taking into account Class 1 NIC paid and the annual maximum.

 

Class 2 NICs are not included when SA payments on account are calculated. But payments on account do include Class 4 contributions.

 

What has gone wrong?

We have come across a number of problem areas:

 

  • Taxpayers not registered as self-employed for NIC purposes in NPS – there appear to be a number of reasons for this, one of which is that HMRC automatically recorded a cessation for those taxpayers who cancelled a direct debit which was in place for Class 2 NIC. HMRC has not charged Class 2 NIC in these cases.
  • Temporary NI numbers in SA – in some cases the SA record held an incorrect or temporary NI number and, therefore, NPS did not populate the Class 2 liability or Class 1 paid in SA. This has resulted in HMRC not charging Class 2 NIC and/or charging an incorrect amount of Class 4 NIC.
  • Class 1 paid not taken into account – in some cases this is because HMRC had not reconciled the employee record in NPS and, therefore, the Class 1 paid was not yet populated in SA when the return was filed. In other cases the employment information in NPS is incorrect.
  • Sundry other issues – other errors have been reported, eg, around state retirement age, but these may be case specific. There were some software errors which have now been corrected. The process is messy where the liability is partly collected directly (eg, A1 certificate) and partly through SA, but this is a feature of the system.

 

What is the solution?

ICAEW and other professional bodies have raised this issue with HMRC but, unfortunately, HMRC is unable to provide a general solution. Each case has to be taken up individually with the National Insurance helpline on 0300 200 3500 (calls to the Agent Dedicated Personal Tax Line will be transferred to the NI helpline); this is very frustrating and a great waste of agent time.

 

Agents will check calculations and pick up the issue but there may be many unrepresented taxpayers who miss the problem until they come to claim state pension or other benefits.

 

What changes are expected in the future?

The government confirmed at Autumn Statement 2016 that it will proceed with the abolition of Class 2 NICs and that Class 4 contributions will become contributory. This change was covered in the Tax Faculty National Insurance Update webinar in December and details are also available in the consultation response from the government on this proposal.

 

The change is expected to apply from April 2018 and ICAEW will publish further information when the full detail, including the legislation, is available.

 

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