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HMRC internal manual

Employment Status Manual

Application of the NICs rules: annual earnings periods example

Mr and Mrs T carry on business in partnership and make up their accounts to 5 April 2001. The partnership’s income is made up as follows:

  • £50,000 is derived from relevant engagements, of which Mr T earns £30,000 and Mrs T earns £20,000
  • £15,000 from contracts that are not relevant engagements

Of the partnership’s expenses of £12,000:

  • only £5,900 would be allowable under the employment income rules, of which £2,200 relate to Mr T and £1,700 to Mrs T; and
  • £8,000 can be attributed to the relevant engagements

Partnership accounts year ended 5 April 2001

Income £65,000
   
Expenses £12,000
Profit £53,000

Allocated Mr T £26,500 and Mrs T £26,500

Calculation of deemed payment on 5 April 2001

    Mr T Mrs T
       
Step One Income from relevant engagements 30,000 20,000
  Deduct    
Step One 5% flat rate allowance 1,500 1,000
Step Three Employment Income expenses 2,200 1,700
  Total deductions 3,700 2,700
  Net amount 26,300 17,300
Step Eight Secondary Class 1 NICs on deemed payment 2,383 1,404
Step Nine Deemed payment 23,917 15,896

Recalculation of partnership’s taxable profits

Partnership profit   53,000
     
Add    
Disallowed expenses*   1,600
Total   54,600
Deduct Secondary Class 1 NICs on deemed    

payment +

Deemed payment 3,787
39,813 43,600    
  Taxable Trading Income profit   11,000
  • The disallowed expenses are based on the excess of the Trading Income expenses over the sum of the Employment Income expenses and 5% allowance (8,000-(3,900+2,500).

  • The amount of Class 1 NICs due on the deemed payment is calculated using an annual earnings period, irrespective of the fact that the partners are not directors (for calculation method see ESM3232).

Overall position for 2000/01

Mr T will pay tax and Class 1 NICs based on deemed Employment Income of £23,917. He will also pay Class 4 NICs based upon a Trading Income profit of £5,500.

Mrs T will pay tax and Class 1 NICs based upon deemed Employment Income of £15,896. She will also pay Class 4 NICs based upon a Trading Income profit of £5,500.

Both Mr and Mrs T paid Class 2 NICs for 2000/01 of £104 (52 weeks at £2 per week).

Overall NICs liability for 2000/01

  Mr T Mrs T
     
Class 1 1,997 1,194
Class 2 104 104
Class 4 78 78