Dear Fellow landlords,
I just come accross a web page stating that Class 4 NI shouldn’t be payble when rental incomes from property is used as an investment, otherwise must be paid accordantly.
I would like to know more about SA Class 4 NI.
Do you actually pay Class 4 NI when incomes are above £9.500 and use the property as investment (not trade)?
Note: I already paying NI from a employed job.
Any advice, please?
By “investments not trade”, do you mean keeping it empty? Mine have tenants; the income is more than £9500 and I pay no NI.
NI is paid on trading income, not investment income.
Most landlords will qualify as investors rather than traders.
Your NI contributions from PAYE already cover you for ‘qualifying years’ when you reach State Pension Age [SPA]. HMRC won’t usually accept that a LL is ‘trading’, as opposed to receiving ‘investment’ income [their terminology]. Although, the wording of the criteria appears subjective!
I did have a LL friend who retired before reaching SPA, whose main income was Rental income, who, based on the wording of the HMRC Manual, got the NI team to agree that it was trading income, despite using an agent for most activities - and allowed her to pay a few quid a week NI contributions - which, effectively, made up additional qualifying years for SP calculation [instead of making up the much higher weekly “voluntary” contributions to qualify for additional SP!
HMRC advised me I couldn’t apply this (same ‘loophole’?)
Thanks a lot @David122 @Cath2 @Sue6 for your reply.
I looked into the SA, I thought the payment on account due in July 2022, was related to Class 4 NI, but actually isn’t. Consequently I am now facing a new question:
Why they are demanding a payment on account that never appear in my Self Assesment before?
Any idea about the calculation?
Thanks.
Hi Dom,
once your SA ‘Income Tax Due’ is over £1000 per tax year end, HMRC take “payments on account” x twice a year - once by 31/1 (in advance for the Tax Year Ending (TYE) in the April thereafter - and once in arrears - by 31/7. They base it on your Net Profits for the previous TYE. Until or if you submit your actual SA Tax Return for each TYE 5/4, the Assessed amounts remain in place. You’ll be able to view the calculations on your SA account online, plus HMRC will email you showing how the figures have been calculated.
If you complete paper SA100 Returns, you have to submit it by 31/10 (i.e. 6.5 months after the TYE) and have the option of letting HMRC do your calculations for you. If, as most folk do, you do it online, you have 'til 31/1 of the following year to submit - and pay all tax due.
IF you’re late in meeting the deadline, HMRC will charge you an immediate £100 fine (for each of failure to submit return AND failure to pay. The penalties increase the longer you delay, PLUS with Interest accruing on top.
Where you have paid too much on account - and you’re able to do the calculations yourself, when you submit the return by 31/1, you can just work out the balance due yourself (making sure you don’t underpay - BUT, ensuring you include the 50% advance payment for the next Tax Year.
N.B. You’re not liable for Class 4 NI at all.
Regards,
Sue
Still confused?
Previous reply seems correct .
Basically, as with self employed, if you make a profit on your investment in one year, they tax it and assume you will make the same profit next year.
They ask you to pay tax for next year’s profit in advance (of submitting next year’s self assessment, SA), half in January and the other half in July.
As this is different from PAYE, that way you don’t get an unexpected tax bill on the investment, in addition to your PAYE tax: it has already been paid!
Your SA will then result in a potential refund or extra charge depending on how much profit you actually make next year.
If still investing as a landlord, the process repeats: pay tax in advance based on the previous year’s profit!
I have been S/E for 50 years I still dont get the tax system , my mind goes blank ! so thats why I pay an accountant !! Even when I add up all the invoices I still get the totals wrong !
Nice to know I am not alone Colin3: I have to triple check my expenses, and at my last self assessment I added up the previous year’s expenses by mistake! That error has resulted in numerous interactions with HMRC, as their system does not seem to cope with a change in submission after the first submission made in error: need to get it right first time every time!
I too was shocked the first time I had to pay tax in advance of earnings, and it took me a while to understand how it confusingly worked. If I recall correctly, HMRC attempt to explain this on their website somewhere nowadays.
It’s quite simple, when you get your head round it.
Say you owe £900 for 2020-21. You pay £900 by 31 Jan 2022, and you’re done.
But say you owe £1,000. You then have to pay that £1,000 by 31 Jan 22 plus another £500 (half of the tax owed) on account for 2021-22. Then you have another £500 to pay by 31 July 22.
If you then owe £1,100 for 2021-22, you would pay the balance owing of £100 by 31Jan 23, plus your first payment on account for 2022-23 of £550. And then a second payment on account of £550 by 31 July 23.
And so on…
If you know you have had a year high in repairs and you know your tax will be less, you can reduce the payments on account (via your online account), but if you reduce them by too much, they will charge interest (2.6% at the moment from memory).
But if you know you will owe more, you still only have to pay the calculated payment.
… And it’s not really in advance of earnings, it is in advance of the filing deadline for the tax return for those earnings.
Your first payment on account for 2020-21 (6 April 2020-5 April 2021) is due in January 2022, at which point, you are almost 10/12ths of the way though the tax year, so should have 10/12th of your tax money for the year set aside, so a 50% payment on account shouldn’t be a problem.
By that time, you probably have a good idea of what the year is going to look like, and so whether you could reduce the payments on account.
The second payment on account is nearly 4 months after the end of the tax year (and past PAYE deadlines so you should have your P60 and any extra info from employment, eg P11Ds for any benefits), so you could easily have done your tax return by then and know what you have to pay.
The key thing about the above is that if you are not employed, built up qualifying years vv living off your rental income, unless you pay self employed NI your pension will be severely impacted.
That will depend on individual circumstances. There are some circumstances (the most common is being registered for child benefit, even if you don’t receive it - so a non-working parent should always register even if their partner earns more than £60k so they won’t get to keep any of it) where you get credits towards your pension without earning anything or paying NI…
Also, if you are employed and earn between £120 and £184 per week, you won’t pay any employee national insurance, but you get your pension credits as if you have.
I do have one client with a rental property that HMRC has let pay voluntary class 2 NI. He did used to have a holiday let when he applied though, so I don’t know if that influenced them, and it was over 10 years ago. So I don’t know what the current thinking is.