Question

Mr Davies earned £1,040 from his employer in the week ending 11 August 2017. In addition to his salary his employer also provides him with a company car. Mrs Davies is self-employed and in 2017/18 had trading profits of £49.800. Required: a) Compute the primary and secondary Class 1 National insurance (NI) contributions relating to the payment to Mr Davies for the week ended 11 August 2017 5 marks b) Explain how Mr Davies' employee benefit of a company car is treated for NI purposes. 3 marks c) Compute the self-employed NI payable by Mrs Davies for 2017/8. 5 marks d) Discuss whether you consider NI to be a progressive tax or a regressive tax. 7 marks

tax tables:

Rates and allowances

INCOME TAX (2018/19)

%

Basic rate £1 – £34,500 20%

Higher rate £34,500 – £150,000 40%

Additional higher rate £150,001 onwards 45%

A starting rate of 10% applies to savings income where it falls within the first £5,000 of taxable income.

Personal allowances (2018/19)

       £

Personal allowance    11,850

Car fuel benefit (2018/19)

The base figure for calculating the car fuel benefit is £23,400.

Approved mileage rates (2018/19)

Car and vans: 0 – 10,000 miles 45p per mile

10,000+ miles 25p per mile

Motor cycles 24p per mile

Bicycles 20p per mile

CAPITAL GAINS TAX (CGT) (2018/19)

Standard rate of CGT     10%*

Higher rate of CGT     20%*

Entrepreneurs’ relief rate     10%

Annual exemption £11,700

Entrepreneurs’ relief        £10,000,000

*An 8% surcharge applies in respect of residential properties.

NATIONAL INSURANCE (NI) (2018/19)

CLASS 1 (primary)

Earnings up to £162 a week Nil

Earnings between £162 and £892 12%

Earnings over £892 a week 2%

CLASS 1 (secondary)

Earnings up to £162 a week Nil

Earnings over £162 a week 13.8%

CLASS 2

Weekly Contribution – £2.95

Small earnings exception - £6,205

CLASS 3

Weekly contribution - £14.65

CLASS 4

Lower profits limit £8,424

Upper profits limit £46,350

Rate on profits between upper and lower limit – 9%

Rate on profits beyond upper limit - 2%

Answer 1

a) Calculation of primary and secondary Class 1 National Insurance contributions-

Primary Class 1 National Insurance

As the earnings per week are £1,040, the employee will pay as follows -

-Nothing on the first £162

-12% (£87.60) on your earnings between £162.01 and £892

-2% (£2.96) on the remaining earnings above £892.

This means the employee will pay National Insurance as £90.56 for the week ended 11 August 2017.

Secondary Class 1 National Insurance

This is the Contributions that employers are required to pay for their employees.

-Nothing on the first £162

-13.8% (£121.164) on earnings above £162.01

b) Treatment of company car for National insurance purpose

Mr Davies does not have to pay National Insurance on benefits if he is using it for company purpose. His employer will pay National Insurance contributions on them instead

However if he or his family uses the company car privately, including for commuting. He has to pay tax on the value of the company car, which depends on things like how much it would cost to buy and the type of fuel it uses.

This value of the car is reduced if:

• he have it part-time
• he pay something towards its cost
• it has low CO2 emissions

If his employer pays for fuel he uses for personal journeys, he will pay tax on this separately.

c) If a person is self-employed he has to pay two different classes of NI – Class 2 and Class 4,

The amount of Class 2 NI due is based on the number of weeks of self-employment in the tax year. Assuming that Mrs. Davies was self employed throughout the year. Mrs Davies should pay Class 2 NIC = 12*4*2.95=£141.6

The Class 4 NI is paid in profit as follows-

£8424 to £46350 = £3413.34

£46350 to £49800 = £69

Total = £3482.34

d) NIC appears to be a regressive tax as it lacks the progressive nature, which disproportionately hits the low and middle earners.

The first section deals with employee contributions part of NI. Any annual earnings below £162 will be taxed at 0%, but earnings in between £162 to £892 are to be charged at 12%. However with no justifiable reasons – the rate drops to only 2% for earnings over £892. Such could imply the more the taxpayer earns, the less NI rate will be paid.

National Insurance is an earnings tax that is highly regressive - especially the employee contributions part. The progressive nature (the more your income, the higher percentage you pay) of Income Tax is largely undone by regressive National Insurance (NI) which disproportionately hits low to middle earners.