employee’s knowledge. If the employer deducts national
insurance contributions from earnings and fails to pay
them over to HMRC, the employee is treated as though
they had been paid over unless the employee is negligent
or has consented to connive in the non-payment. The
trader must also tell the Tax Office, at the end of each
tax year, how much each employee has earned and the
amount of deductions for tax and NIC together with any
benefits paid, e.g. car allowance. The employees must
also be given a statement showing their earnings for the
year, the tax and NIC deductions paid, and any benefits
provided.
National insurance
Most people who are in work pay national insurance
contributions. The class of contribution paid depends
upon whether the person concerned is employed or
self-employed.
Class 1 contributions are paid by employed earners
(primary contributors) and their employers (secondary
contributors). These contributions are not paid where
the earnings are less than the lower earnings limit, cur-
rently £90 a week. For monthly payments, the figure is
£390 and the annual figure is £4,680. These figures are
for the year 2008/09 and change annually. They are
therefore an illustration only.
Those who are self-employed pay two kinds of NIC:
Class 2 which all self-employed people pay and Class 4
which becomes payable if profits are above a certain limit.
Class 2 contributions must be paid by self-employed
earners unless they have a certificate of exemption on
the ground that their income is below a certain level, e.g.
£4,825pa in 2008/09. Expenses are deducted when cal-
culating earnings. Class 2 contributions are payable at
a flat rate; this is £2.30 a week for 2008/09. Class 2 con-
tributions can be paid by a bank direct debit or under
other billing arrangements provided by HMRC national
insurance contributions office, the old Contributions
Agency having been merged with HMRC.
Class 2 contributions do not count for the payment of
unemployment benefit, but they do count for incapacity
benefit, basic retirement pension, widow’s benefit and
maternity allowance. Application can be made for repay-
ment of Class 2 contributions if the earnings in the relevant
year are low enough to entitle the earner to exemption.
Class 4 contributions are paid by self-employed ear-
ners. They are levied as a percentage of profits, i.e. for
2008/09 it is payable on earnings between £5,435 and
£40,040 at the rate of 8 per cent. For profits above the
band, i.e. profits in excess of £40,040, the rate is cur-
rently 1 per cent.
The profits are those chargeable to income tax under
Schedule D, and Class 4 contributions are usually collected
by HMRC with the income tax. Class 4 contributions do
not give the trader any additional benefits.Schedule D – advantagesA major advantage with Schedule D is the trader’s abil-
ity to deduct expenses which would not be allowable to
employed persons. For example, the trader may use a
room in his home as a study from which to write and a
partner may use another room as an office from which
to help with the work. If so, a proportion of the heating
and lighting and other costs of the home may be allow-
able against tax, whereas they would not be allowable to
an employee who brought work home to complete in a
study. There are also capital allowances available to the
trader in regard, for example, to plant and machinery,
such as a new computer which has been purchased dur-
ing the year.PartnershipsThe trading and professional income of a partnership is
charged to tax under Schedule D, which applies the cur-
rent year basis of assessment to this income, as in the
case of sole traders.
To a large extent a partnership is treated as a separate
entity for tax purposes in that assessments are made
jointly on the partnership. The profits assessed for the
tax year in question are allocated among the partners
according to the partnership agreement, e.g. in the profit-
sharing ratio. The tax assessment for each partner is then
calculated separately taking into account personal circum-
stances. The individual assessments are then aggregated
and the total bill is a liability of the firm. Because partners
are ‘jointly and severally’ liable for the debts of the firm
(see further, Chapter 5) any of the partnerscould be liable
for the whole bill if the other partners wereinsolvent.
As to settling the bill, there are two main ways as follows:■each partner pays his share of the liability into the part-
nership account and the partnership pays the bill; or
■the partnership pays the full amount and the current
accounts of the individual partners are charged with
each one’s share.Part 2Business organisations