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Hi
I have just done a practice question on finding the employees NI amount payable for one month in the year, in this case the allowance of £8164 was divided by 12 and £680.33 was deducted from the months salary to ascertain the balance of salary that NI was due on for that month. Which makes sense.
In another question, someone had started in business January, was a sole trader and had traded for 4 months and done accounts for this period Jan – April. The question asked was to provide the Class 4 NI due on the individual for the accounts period January – March 3 months.
So I as in the first example pro rated the NI free allowance for 3 months to establish the balance that NI was due on.
EG Income for Tax was 15000 for 4 months. Therefore 15000/4 x 3 gave me the income of £11250.
I Followed precedent and did the following for the NI free deduction. £8164/12 x 3 = 2041. Giving me £11250 – £2041 = 9209 assessible for NI. This was apparently incorrect.
The correct answer was £11250 – 8164 (the entire years allowance) = 3086 assessible for NI ! so not pro rated at all for the 3 months of trading. This treatment surprises me and appears to be illogical. Especially as the question did not give how the £8164 may have already been used in the period preceding the start of business in January by the individual (they could have been employed).
Can you explain why my answer was wrong and principle involved please.
Thank you.
It would appear that you are using old material as the NIC threshold you use above is out of date – you MUST use FA 2018 ACCA approved provider material only!
Thanks for feed back, The lectures are fab. I was going to take exam in March 2019 and planned on doing a revision of all new rates before the June exam, hence using rates applicable for March 2019 exams.
So supposing I substitue above the 8164 with 8424 instead, it would be helpful to know the principle that allows the NI free rate to be pro rated in one instance, but not in the other. I just see a danger where the 8424, could actually be abused. EG the person setting up business could already have claimed 9 months of this 8424 (pro rated) as an employee and then receive £8164 in total against self employed earning of 3 months.
Class 1 NIC’s are payable according to your earnings basis – if you are paid a weekly wage there are weekly limits and if paid a monthly salary there are monthly limits. In our exam however they only give you the annual limits hence if you only have 3 months salary in the tax year you use 3 months of the annual limits – in reality the Class 1 NIC’s would have been computed and paid over on a monthly basis using the monthly limits.
For a business the Class 4 NIC is based on the trading profit assessment for the tax YEAR in which it is assessed and the annual limits are always applied irrespective of whether there are 12 months of profit being assessed or only a few months which might occur in either the first tax year of trading or the final tax year.
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