Is Employee NI due on LC

[wilks]

Can the "advisers" clarify once and for all if employee NI is due on the loan charge.
2 different advisors have said to me the loan charge works by deeming the loans to be a relevant step within Part 7A ITEPA and all such charges are deemed employment income with corresponding provisions applying for NIC purposes.

However I see Iliketax says in several threads on this site that if the employer no longer exists (regardless of whether onshore or offshore) employee NI is not due under the LC?

[Iter]

You might be getting confused with settlement terms cls02. With loan charge I believe all your income which includes loan is then taxed as per normal 18-19 rates

[wilks]

You might be getting confused with settlement terms cls02. With loan charge I believe all your income which includes loan is then taxed as per normal 18-19 rates

The question is very clear - is employee NI due on the loan charge (whether employed or self employed) i.e. for most the loan charge will be taxed at 45% so is an extra 2% NI due or not?

If you are not ILT, Gwebb, Phil then no offence but do not bother responding.

[Iliketax]

The question is very clear - is employee NI due on the loan charge (whether employed or self employed)

While the question was clear originally, you've now muddled things. Which one are you asking about?

[wilks]

While the question was clear originally, you've now muddled things. Which one are you asking about?

The original question applies - is employee NI due on LC.

I have seen your responses on another thread that it is due for self employed but not for employed (e.g. EBTs) where the employer (onshore or offshore) no longer exists and if this is correct then I would like to understand the reason.

2 separate advisers say employee NI is due on LC under the legislation and they make no distinction between employed where employer no longer exists and self employed but maybe they are generalising.

[WTFH]

The original question applies - is employee NI due on LC.

I have seen your responses on another thread that it is due for self employed but not for employed (e.g. EBTs) where the employer (onshore or offshore) no longer exists and if this is correct then I would like to understand the reason.

2 separate advisers say employee NI is due on LC under the legislation and they make no distinction between employed where employer no longer exists and self employed but maybe they are generalising.

OK, it might help if, rather than you saying things are the same and jumping between one ad the other, just state what your position was.
1. Were you self employed?
2. Were you employed?
3. Were you in an EBT scheme?
4. Was your employer onshore?
5. Was your employer offshore?
6. Are there any salient facts that you think are irrelevant that might help you get a correct answer?

[Hitchphil]

My trustees advised that for the 2019 LC Employees NIC will be charged at the relevant rate for that tax year +PAYE, but not employers NIC at 12.8%? dont know if that's true but its what I have been told.

So my loans added to my now Perm 2019/20 (or 2018/19) PAYE salary it seems will be taxed at 42% as I am already over the threshold for 40% PAYE & 2% NIC (but combined salary & loan I will be under the £100k income tax threshold).

My other option is repay the loans & transfer the Trust back to me at some later date when retired & pay 20% (assuming no NIC then? & I am intending to manage drawdown & pensions to be under the 40% tax rate for combined taxable pension income).

[webberg]

We have an analysis of the NIC position on the loan charge that we have shared with HMRC in an effort to arrive at a consensus.

We have been trying to do this for many months now and - being honest - we have not get to where we want to be.

Therefore the following is our best guess as of today (and we reserve the right to make alterations if and when HMRC respond).

The loan charge is a charge on the employer (if it is within Schedule 11 - employment schemes).

Where the employer is still around, they have an obligation to report the loan values and will receive an assessment.

That assessment will be for income tax.

Where the employer has such an assessment and the loan was made in the previous 6 years, they may also get an NIC assessment for employee NIC.

We have some doubt about when the 6 year period begins and ends - again waiting on HMRC, or more precisely waiting on them to respond to a counter argument we put to them after they claimed that the 6 year limitation starts from when they decided NIC could be due.

The above is based on situations in which the employer is around. We have a number of unanswered questions about how that employer is identified.

Where the employer (however defined) is not around, then the loan charge "transfers" (poor word but the correct effect) to the employee.

Given that the employee NIC liability is primarily the responsibility of the employer to deduct and pay and they are not around, we struggle to see that an employee NIC charge can arise.

Where loan charge assessments are based on Schedule 12 (basically self employed arrangements), the NIC in question is Class 4. (Strictly, Class 2 as well but I'm going to ignore that here).

The Schedule 12 assessment is based on the loans being treated as a post cessation receipt from a business.

Class 4 is due on profits from a business. Once they exceed a given level a charge is applied.

So, is a post cessation receipt, profits from a business?

Whilst there are strong indications that the answer here could be "no", let's assume the answer is "yes".

If "yes", then subject to the 6 year limit and the uncertainties there, Class 4 could be due.

How much?

Well there is a "free" amount, then a band chargeable at around 8%/9%? (I'm not able to access my tables at the moment, so am guessing) and then a charge of 1%/2% on all amounts above the chargeable band.

There are however limits to how much NIC you can be obliged to pay in any one year.

If you do have a Schedule 12 assessment for 2018/19 but are working and paying NIC (of any class) in that year, then the limit may kick in and the above free/chargeable at full rate/chargeable at lower rate values may not apply.

Do I expect HMRC to apply this limitation at assessment level? No.

You will have to make a separate claim.

Apologies for a long and not very clear answer but I have reported what we know rather than what we don't.

[wilks]

We have an analysis of the NIC position on the loan charge that we have shared with HMRC in an effort to arrive at a consensus.

We have been trying to do this for many months now and - being honest - we have not get to where we want to be.

Therefore the following is our best guess as of today (and we reserve the right to make alterations if and when HMRC respond).

The loan charge is a charge on the employer (if it is within Schedule 11 - employment schemes).

Where the employer is still around, they have an obligation to report the loan values and will receive an assessment.

That assessment will be for income tax.

Where the employer has such an assessment and the loan was made in the previous 6 years, they may also get an NIC assessment for employee NIC.

We have some doubt about when the 6 year period begins and ends - again waiting on HMRC, or more precisely waiting on them to respond to a counter argument we put to them after they claimed that the 6 year limitation starts from when they decided NIC could be due.

The above is based on situations in which the employer is around. We have a number of unanswered questions about how that employer is identified.

Where the employer (however defined) is not around, then the loan charge "transfers" (poor word but the correct effect) to the employee.

Given that the employee NIC liability is primarily the responsibility of the employer to deduct and pay and they are not around, we struggle to see that an employee NIC charge can arise.

Where loan charge assessments are based on Schedule 12 (basically self employed arrangements), the NIC in question is Class 4. (Strictly, Class 2 as well but I'm going to ignore that here).

The Schedule 12 assessment is based on the loans being treated as a post cessation receipt from a business.

Class 4 is due on profits from a business. Once they exceed a given level a charge is applied.

So, is a post cessation receipt, profits from a business?

Whilst there are strong indications that the answer here could be "no", let's assume the answer is "yes".

If "yes", then subject to the 6 year limit and the uncertainties there, Class 4 could be due.

How much?

Well there is a "free" amount, then a band chargeable at around 8%/9%? (I'm not able to access my tables at the moment, so am guessing) and then a charge of 1%/2% on all amounts above the chargeable band.

There are however limits to how much NIC you can be obliged to pay in any one year.

If you do have a Schedule 12 assessment for 2018/19 but are working and paying NIC (of any class) in that year, then the limit may kick in and the above free/chargeable at full rate/chargeable at lower rate values may not apply.

Do I expect HMRC to apply this limitation at assessment level? No.

You will have to make a separate claim.

Apologies for a long and not very clear answer but I have reported what we know rather than what we don't.

______________


Interesting thanks, I am interested in employment schemes (e.g. EBTs) where employer no longer exists but I was trying not to be so specific soas all could benefit from the view.
What are your thoughts on the below which is why some claim there is no employee NIC due on LC for those in employment schemes (e.g. EBTs) where the employer no longer exists (see full link below). Class 1 NICs is both employer and employee NICs so do we assume from the below neither applies under this scenario?

Tackling disguised remuneration - GOV.UK

Dissolved employer
As the third party in a DR scheme exists independently from the employer, it is possible for a Part 7A charge to arise where the employer has been dissolved or no longer exists. Sections 7, 8 and 9 of the Taxes Management Act 1970, set out the employee’s responsibility to return the employment income to HMRC by making a self-assessment return. As a result the employee is responsible for reporting the income and paying the tax to HMRC. The employee will not be liable for any Class 1 NICs due.

[Iliketax]

Where the employer is still around, they have an obligation to report the loan values and will receive an assessment.

No. There is no assessment. It is just a normal RTI payroll obligation. So the employer has to operate PAYE / NIC proactively rather than wait for HMRC to tell it to do so.

Where the employer has such an assessment and the loan was made in the previous 6 years, they may also get an NIC assessment for employee NIC.

We have some doubt about when the 6 year period begins and ends - again waiting on HMRC, or more precisely waiting on them to respond to a counter argument we put to them after they claimed that the 6 year limitation starts from when they decided NIC could be due.

The above is based on situations in which the employer is around.

No. That is not right. Paragraphs 1(1) and 1(2) Schedule 11 Finance (No 2) Act 2017 treats a relevant step as taking place on 5 April 2019. It is deemed relevant step that creates the employment income tax charge and the NIC earnings then follows that. When the actual loan was made is not relevant for the April 2019 loan charge.

Where loan charge assessments are based on Schedule 12 (basically self employed arrangements), the NIC in question is Class 4. (Strictly, Class 2 as well but I'm going to ignore that here).

The Schedule 12 assessment is based on the loans being treated as a post cessation receipt from a business.

Class 4 is due on profits from a business. Once they exceed a given level a charge is applied.

So, is a post cessation receipt, profits from a business?

Whilst there are strong indications that the answer here could be "no", let's assume the answer is "yes".

It might be worth looking at s23E(1) which says "... the amount is to be treated ... as profits of the relevant trade". So I'd suggest that is a strong indication that the answer is "yes".

If "yes", then subject to the 6 year limit and the uncertainties there

Er, no. Paragraphs 1(1) and 1(2) Schedule 12 Finance (No 2) Act 2017 says that the relevant benefit is treated as being made on 5 April 2019. This means that it is taxable in 2018/19 (and NIC is based on the too). The fact that the loan was made before 6 April 2017 is not relevant. And just because s23E says it is "for" a different tax year doesn't change it being assessed in 2018/19.

Out of interest, there is still no HMRC guidance on self-employed DR.

There are however limits to how much NIC you can be obliged to pay in any one year.

If you do have a Schedule 12 assessment for 2018/19 but are working and paying NIC (of any class) in that year, then the limit may kick in and the above free/chargeable at full rate/chargeable at lower rate values may not apply.

No, there is no cap on the NIC in 2018/19. However, if you are old (i.e. have reached state pension age) then no employee's NIC is due. The rule for class 4 NIC is slightly different but can be googled.