Class 2 National Insurance, small earnings exception and the £100 penalty
At a recent meeting of the Personal Taxes Sub-committee the issue of the Class 2 National Insurance (NI) late notification penalty was raised. It appears that there may still be some people who are not aware of the three-month rule for notifying liability and there may be some confusion over the exact workings of the small earnings exception. Article by Liz Lathwood, , Technical Officer (Personal and Capital Taxes), published in the March 2002 issue of Tax Adviser.The three-month period and the penalty
This penalty came in on 31 January 2001 more or less as a direct result of the recommendations in Lord Grabiner’s report on the informal economy. Lord Grabiner recommended that:
- more assistance should be given to the newly self-employed at the outset to avoid trouble later on with the Inland Revenue departments and possibly other regulatory bodies; and
- to facilitate the provision of support there should be an effective requirement to notify the Revenue on or soon after the start of business.
One of the main changes is that people will be required to register for National InsuranceContributions (NICs) within three months of commencing self-employment instead of the previous six-month period, measured from the end of the first tax year (as provided by Taxes Management Act
1970 (TMA 1970), s. 7).
The Chartered Institute of Taxation (CIOT) made strong protests about:
- the foreshortening of the time period to three months;
- the lack of proportionality in the penalty (£100 for not notifying a yearly charge of £104); and
- the difficulties of defining the date of commencement for smaller business activities.
The Revenue’s own summary of responses to the consultation indicates that the CIOT was not the only body to protest, but nevertheless the legislation went ahead as planned. Consequently many small businesses have now received penalty bills from the National Insurance Contributions Office (NICO) in Newcastle.
The October 2001 Tax Bulletin explains the registration and penalty procedures in some useful detail.
The small earnings exception
Some people can, however, gain exemption from the penalty if their earnings are within the annual Small Earnings Exception limit (£3,825 for 2000–2001 and £3,955 for 2001–2002).
For such businesses there is still a requirement to register, but the penalty should not be charged. Regulation 87(3)(c) of the consolidated Social Security (Contributions) Regulations 2001 SI No 1004 provides:
‘that a person shall be treated as having immediately notified the Board’
if he or she
‘shows to the Board’s satisfaction that his earnings met the conditions set out in regulation 45(1) … throughout the period beginning on the date on which he became liable to pay a Class 2 contribution and ending on the date on which he notified the Board’.
Regulation 45 details the small earnings exception. The existence of this exemption does not appear to be widely known and the October Tax Bulletin article explains how to dispute the penalty where it applies.
Once entitlement to the Small Earnings Exception is established the potential contributor will receive a Certificate of Exception. This runs to some date in the future (determined by the Board according to the individual circumstances of the case). We are advised by the Revenue that even if the earnings subsequently exceed the small earnings limit there is no question of a penalty being charged at some future point in time. The expiration of the certificate will result in either the contributor paying Class 2 National Insurance or applying for a new certificate. The only way a penalty could arise subsequently would be if the contributor ceased self-employment, then recommenced, and then failed to notify.
The October Tax Bulletin clarifies the link with the need to notify for income tax purposes:
‘People who register for Class 2 NICs liability will now also be registered for Self Assessment and should be sent a tax return for the year they start business. They will therefore not need to give separate notice of their chargeability to income tax for that year.’
Useful information is also provided on the position for those who are already paying the maximum amount of Class 1 NICs as employees, but are liable to register for Class 2 when they start self-employment.
020 7235 9381
March 2002 by