Jet Accountancy

Special rules apply to company directors when it comes to calculating their Class 1 National Insurance liabilities.

Why the rules

Directors, particularly of personal and family companies, can control how and when they are paid and, in the absence of special rules, would be able to reduce their Class 1 National Insurance liability by manipulating the earnings period rules. The rules circumvent this.

Annual earnings period

Company directors have an annual earnings period for National Insurance regardless of their actual pay frequency. This means that if they do not opt to apply the alternative arrangements, their National Insurance liability is calculated cumulatively by reference to the annual thresholds.

For 2021/22 these are as follows:

	Annual threshold
Lower earnings limit	£6,240
Primary threshold	£9,568
Upper earnings limit	£50,270

Example

A director is paid £8,000 a month. In month 1, he pays no National Insurance as his earnings are below the annual primary threshold of £9,568.

In month 2, his earnings for the year to date are £16,000. By applying the annual thresholds, his total liability on his earnings to date of £16,000 is £771.84 (12% (£16,000 – £9,568)). As he paid no National Insurance in month, his liability for month 2 is £771.84.

For months 3 to 6 inclusive, his earnings for the year to date fall between £9,568 and £50,270. Consequently, he pays employee’s National Insurance at 12% on his earnings for the month of £8,000, equal to £960 each month.

In month 7, his earnings for the year to date are £56,000 (7 months @ £8,000 a month), on which total contribution of £4,998.84 (12% (£50,270- £9,568)) + 2% (£56,000 – £50,270)) are due. He has already paid £4,611.84 (£771.84 + (4 x £960)), leaving £387 due for the month.

As his earnings for the year have now exceeded the upper earnings limit, he will pay National Insurance at the rate of 2% of all future payments – a liability of £160 per month.

Applying the annual earnings period rules means that the contribution liability falls unevenly throughout the year. The liability for the year is £5,798.60 ((12% (£50,270 – £9,568) + ((2% (£96,000 – £50,270))).

Alternative arrangements

As seen in the example above, calculating the liability by reference to the annual thresholds on a cumulative basis each time the director is paid means that their pay is uneven throughout the year. To overcome this, the director can opt for their National Insurance to be calculated throughout the year on their earnings for each earnings period using the relevant thresholds for the earnings period, as for employees who are not directors, with an annual recalculation on an annual basis at the end of the year.

If this basis is adopted, the director in the above example would pay National Insurance of £483.26 (12% (£4,189 – £797)) + (2% (£8,000 – £4,189))) each month for months 1 to 11, with a final payment of £482.74 in month 12.

Over the course of the year, the annual liability (£5,798.60) is the same which-ever method is used, but collected differently.

Directors can choose the method that suits them best.

Employers who provided taxable expenses and benefits to employees during the 2020/21 tax year will need to report these to HMRC, on form P11D by 6 July 2021, unless the benefit or expense has been payrolled or is included within a PAYE Settlement Agreement. Benefits covered by an exemption do not need to be included.

Where taxable benefits have been provided, the employer must also file a P11D(b) by 6 July 2021. This is the employer’s declaration that all required P11Ds have been filed and also the statutory Class 1A amount.

Exempt benefit

The tax legislation contains a number of exemptions which remove a charge to tax. These may be specific to a particular benefit, such as those for mobile phones and workplace parking, or may be more general, such as the exemption for paid and reimbursed expenses, which applies if the employee would have been entitled to a tax deduction had they met the expense directly.

There are also a number of temporary Covid-19 specific exemptions that apply for the 2020/21 tax year. These include the provision or reimbursement of Covid-19 antigen tests and reimbursed homeworking equipment (such as a computer) to enable the employee to work at home during the pandemic if the equipment would be exempt if made available by the employer.

Remember, exemptions are only available if the associated conditions are met. However, care must be taken here where provision is made under a salary sacrifice arrangement and the alternative valuation rules apply as this may negate the exemption.

Taxable amount

The amount on which the employee is taxed is usually the cash equivalent value. This is calculated in accordance with the benefit-specific rules where these exists, as is the case for company cars, vans, living accommodation and employment-related loans. Where there is not a benefit-specific rule, the cash equivalent is determined in accordance with the general rule. This is the cost to the employer, less any amount made good by the employee. Amounts made good are only deducted where the employee makes good by 6 July 2021.

If the benefit is provided under an optional remuneration arrangement (OpRA), such as a salary sacrifice arrangement, the alternative valuation rules are used to calculate the taxable amount, unless the benefit is one which is specifically excluded from the ambit of those rules (such as childcare vouchers, pension provision and advice, employer-provided cycles and low-emission cars (l75g/km or less) or within the transitional rules for 2020/21. Under the alternative rules, the taxable amount is the salary foregone or cash alternative offered where this is more than the cash equivalent value.

HMRC produce worksheets which can be used to calculate the taxable amount for some benefits. These can be found on the Gov.uk website.

Reporting options

There are various options for filing P11Ds and P11D(b):

• using a payroll software package;
• using HMRC’s Online End of Year Expenses and Benefits Service;
• using HMRC’s PAYE Online Service; or
• filing paper forms.

Whichever method is used, the forms must be filed by 6 July 2021. Employees must be given a copy of their P11D or details of their taxable benefits by the same date.

Any associated employer-only Class 1A National Insurance must be paid by 22 July 2021 if paid electronically, or by 19 July 2021 if paid by cheque.

To help the hospitality and leisure industry recover from the impact of the first national lockdown, a reduced rate of VAT of 5% was introduced for a limited period from 15 July 2020. The reduced rate of VAT was originally to apply until 12 January 2021. However, in September last year, the Chancellor announced that it would remain at 5% until 30 March 2021.

By the time of the Spring 2021 Budget on 3 March 2021, the hospitality and leisure sectors were suffering the effects of further lockdowns. To provide more help to this sector, the period for which the reduced the temporary 5% rate of VAT will apply has been further extended until 30 September 2021. From 1 October 2021, a new reduced rate of VAT of 12.5% will apply until 31 March 2022. The rate will revert to the standard rate of 20% from 1 April 2022.

Affected supplies

The following supplies will benefit from the reduced rate of 5% until 30 September 2021 and the new reduced rate of 12.5% from 1 October 2021 to 31 March 2022.

1. Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs.
2. Hot takeaway food and hot takeaway non-alcoholic beverages.
3. Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities.
4. Admission to cultural attractions that do not already benefit from the cultural VAT exemption, such as theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and other similar cultural events and facilities.

Where an admission to an attraction is within the existing cultural VAT exemption, this takes precedence over the reduced rate.