Question

Ms Simmons earned £910 from her employer in the week ending 26 June 2016. In addition to her salary her employer also provides her with a company car. Ms Simmons' husband Mr Simmons is self-employed and has his own business. For 2016/17 he has taxable trading profits of £48,800. Required: a) Compute the primary and secondary Class 1 National insurance (NI) contributions relating to the payment to Ms Simmons for the week ended 26 June 2016. 5 marks b) Explain how Ms Simmons' employee benefit of a company car is treated for NI purposes 3 marks c) Compute the self-employed NI payable by Mr Simmons for 2016/17 41 rikes d) Explain what is meant by a hypothecated tax and explain whether or not you consider NI to be a hypothecated tax. 8 marks

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%

End of tax tables

Answer 1

a) Primary Class 1 National Insurance (NI) Contribution

Primary Class 1 NIC relating to payment made to Ms. Simmons are as follows:

On first £162	NIL	NIL
On income between £162 and £892	12%	£87.60
On amount above £892	2%	£0.36
Total		£87.96

Secondary Class 1 National Insurance (NI) Contribution

Employer of Ms. Simmon has to pay Secondary Class 1 NICs of 13.8% on the earnings above the secondary threshold of £162 per week.

On first £162	NIL	NIL
On amount above £162	13.8%	£103.224

b) Ms. Simmons is not required to pay National Insurance on benefit he is getting from his job. His employer will pay National Insurance contributions on them instead.

However, he will pay tax if he or his family use the company car privately, including for commuting.

He will pay tax on the value 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 Ms Simmons employer pays for fuel he uses for personal journeys, he will pay tax on this separately.

c) Self employed NI payable by Mr. Simmons

Mr. Simmons has to pay 2 types of National Insurance as he is self employed -

Class 2 as the profits are £6,205 or more, the rate being £2.95 a week = 12*4*2.95= £141.6 (assuming that he

was self employed throughout the year 12*4)

  Class 4 as the profits are more than £8,424, the rate being 9% on profits between £8,424 and £46,350 and 2% on

  profits over £46,350   

on profits between £8,424 and £46,350	9%	£3413.34
on profits over £46,350	2%	£49
Total		£3462.34

d) Hypothecated Tax means a tax where the money collected or a part of the money collected is spent for a particular purpose rather than spending on a number of other purposes. It is the tax the revenue from which is committed to a particular spending programme.

Yes, National Insurance is a hypothecated tax as a great bulk of amount collected are automatically paid towards social security benefits.

National Insurance Contributions (NIC) pays principally for current State Pensions, some NHS spending and a few social security benefits.

Major part of the contributions go into a special National Insurance Fund and then goes straight out to current (state) pensioners, while the rest goes straight to the NHS without going in to the National Insurance Fund.