Freelancers’ Questions: Do I need the small earnings exception?

Freelancer’s Question: I plan to start-up as a sole trader to do some occasional digital work. At this point I am not expecting to make a great deal of money but it could accumulate over a 12-month period. Should I apply for the Small Earnings Exception? If I don’t apply and make less than the threshold for the SEE, how long do I have to claim this back? And what would happen if I did take the SEE, and apply for a certificate, but then exceeded the threshold?

Expert’s Answer: A sole trader or someone who is self-employed is liable to pay Class 2 and Class 4 National Insurance Contributions (NICs). Class 2 contributions are generally payable at a flat rate of £2.40 per week or £124.80 per annum.

There is an exemption from paying Class 2 NICs, known as the Small Earnings Exemption (SEE). This can be claimed where you do not expect your net profits to exceed the limit for the tax year, which is currently £5,075 for 2010-11. Your net profit figure is arrived at by deducting the cost of goods sold and the day-to-day operating expenditure from the gross business takings or earnings. Capital expenditure is not deductible.

Where the business is new, as in your case, the expected figure of net earnings is acceptable. A refund of Class 2 contributions can be made where it is shown that during the period in question your net earnings from self-employment were below the SEE limit.

The application for a refund must be made on or before 31 January following the end of the tax year for which the refund is claimed. The process is not difficult, but the application must be made in writing to the NIC office and evidence of your earnings provided.

If you go over the earnings exception, you must inform the NIC office of the situation. You will be liable to pay Class 2 NICs for the tax year for which the SSE no longer applies. There is no interest payable on the NIC contributions due, but they may be subject to a higher rate if paid after April 5th following the tax year in question.

You should be aware that it may not be in your best interests to claim SEE or to obtain a refund of Class 2 contributions as this will have benefit implications. You can pay Class 2 NICS voluntarily for these periods, even though you will not be required to do so. The advantage of paying voluntary Class 2 NICs is that it will protect your rights to:

* a basic state pension

* a contribution-based employment and support allowance

* maternity allowance

* bereavement benefits

If you do not pay Class 2 NICs, you may lose your entitlement to the above. Therefore, you need to weigh this up carefully against the annual cost of £124.80.

The expert was Paul Spindler, of chartered accountancy firm Kingston Smith LLP.


18th November 2010

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