ESM8340 - 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
| - | Amount |
|---|---|
| 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
| Step | - | 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
| - | Amount |
|---|---|
| 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 ESM8345).
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 |