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鈥檚 income is made up as follows:
- 拢50,000 is derived from relevant engagements, of which Mr T earns 拢30,000 and Mrs T earns 拢20,000
- 拢15,000 from contracts that are not relevant engagements
Of the partnership鈥檚 expenses of 拢12,000:
- only 拢5,900 would be allowable under the employment income rules, of which 拢2,200 relate to Mr T and 拢1,700 to Mrs T; and
- 拢8,000 can be attributed to the relevant engagements
Partnership accounts year ended 5 April 2001
| - | Amount |
|---|---|
| Income | 拢65,000 |
| Expenses | 拢12,000 |
| Profit | 拢53,000 |
Allocated Mr T 拢26,500 and Mrs T 拢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鈥檚 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 拢23,917. He will also pay Class 4 NICs based upon a Trading Income profit of 拢5,500.
Mrs T will pay tax and Class 1 NICs based upon deemed Employment Income of 拢15,896. She will also pay Class 4 NICs based upon a Trading Income profit of 拢5,500.
Both Mr and Mrs T paid Class 2 NICs for 2000/01 of 拢104 (52 weeks at 拢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 |