The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
Class 2 and Class 4 national insurance contributions (NIC) are paid by self-employed individuals and partners in a partnership on their profits arising within the UK. This guidance note considers Class 4 contributions. ForClass 2 contributions, see the Class 2 national insurance contributions guidance note.
Class 4 contributions are essentially a profit-based tax; there is no attached benefit entitlement. The contributions are calculated according to the level of profits in a tax year. ‘Profits’ for Class 4 purposes includes all profits from a trade, profession or vocation conducted in the UK and are chargeable under ITTOIA 2005, ss 5–23. The calculation of profits for Class 4 purposes is made on the same basis as profits for income tax purposes.
For the 2020/21 tax year, Class 4 NIC is payable at 9% on profits between £9,500 and £50,000 with an uncapped 2% payable on profits above £50,000. Forthe 2019/20 tax year, Class 4 NIC was payable at 9% on profits between £8,632 and £50,000 with an uncapped 2% payable on profits above £50,000, see Example 1.
For the rates and limits for previous tax years, see the GOV.UK website.
The key point is that the upper profits limit is aligned to the UK higher rate threshold. This means that from 2017/18 onwards, Scottish taxpayers suffer higher rate income tax and the main rate of Class 4 NIC on profits between the Scottish higher rate threshold for non-savings income and the UK higher rate threshold. For2020/21, this means that Scottish taxpayers pay 50% of their income over to HMRC (41% Scottish higher rate tax plus 9% main rate of Class 4 NIC) on earnings between £43,431 and £50,000. Fora discussion of the Scottish higher rate threshold for non-savings income and the definition of Scottish taxpayer, see the Proforma income tax calculation guidance note.
‘Profits’ in this context are the tax-adjusted trading profits for the tax year. Remember, income tax deductions or reliefs such as the personal
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