NIC implications of incorporation

Produced by Tolley in association with Julie Butler

The following Owner-Managed Businesses guidance note Produced by Tolley in association with Julie Butler provides comprehensive and up to date tax information covering:

  • NIC implications of incorporation
  • Changes in NIC and dividend rates in 2022/23 and 2023/24
  • NIC annual maxima rules

NIC implications of incorporation

Overview

The Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the NIC aspects.

When a sole trader transfers their business to a company, they will be changing their status for NIC purposes.

Sole traders pay NIC under Class 2 and Class 4. Class 2 contributions are fixed (£3.05 per week for 2021/22 and 2020/21) and are payable on an annual basis through the self-assessment system. For further details, see the Class 2 national insurance contributions guidance note.

Class 4 contributions are based on the taxable trading profits and are charged at 9% between the upper and lower profit limits and at 2% on profits in excess of the upper limit. The lower and upper limits for 2021/22 are £9,568 and £50,270 respectively (2020/21 £9,500 and £50,000).

Note that Class 4 NIC (like income tax) are charged on the taxable profits of the business for the tax year, irrespective of whether the trader draws the profits out of the business. The trader’s actual drawings are irrelevant for tax and NIC purposes. See the Class 4 national insurance contributions guidance note for more information.

Payment of Class 2 and Class 4 will no longer apply o

Popular documents