This time last year I blogged explaining the complex National Insurance rules for entertainers and how their application could result in overpaid National Insurance.
In a year much has changed: recognising the existing rules were difficult to implement, last May HM Revenue & Customs (HMRC) opened a consultation on simplification. Of the nearly 12,000 responses received, 99% supported the proposal to repeal the regulation that treats an entertainer as self-employed for tax purposes, but employed for National Insurance.
The result is that from 6 April 2014 individuals working in the entertainment industry are treated as self-employed for both tax and National Insurance purposes.
What does this mean for the entertainer?
The best way to illustrate the impact of these changes is through a simple case study:
Margot is a self-employed actor. In the 2014/15 tax year Margot is cast in a play produced by GJ Theatre Productions Ltd. GJ Theatre Productions agree to pay Margot £1,000 a week for her services for the ten weeks the play will run. To avoid complicating matters, we will assume that this is Margot’s only source of income in 2014/15.
A cash advantage
Under the old rules, GJ Theatre Productions would have been required to deduct Class 1 National Insurance contributions (NICs) from payments to Margot. Therefore, for every weekly payment of £1,000 Margot would have received £918 into her bank account. From 6 April 2014 Margot will receive the full £1,000, meaning an extra £82 in her pocket every week, or an additional £821 by the end of the play’s ten week run.
However, under the old rules, Margot would have been able to claim credit for the Class 1 NICs deducted from the payments. This would effectively cancel out any requirement to pay Class 4 NICs on this income.
Going forward, Margot will instead pay Class 4 NICs on the profit from her self-employment although she will benefit from the fact that Class 4 NICs are set at a lower rate than Class 1 NICs.
In addition to Class 4 NICs, self-employed individuals pay Class 2 NICs. Under the old rules Margot would have been eligible to apply for an exception from Class 2 NICs. This option is no longer available to her, and she will be required to pay Class 2 NICs at a weekly rate of £2.75 from 6 April 2014.
Despite the requirement to pay Class 2 and Class 4 NICs, at the end of the year Margot will still be £494 better off as a result of the simplification of the National Insurance Regulations.
An unexpected liability
Margot will pay her Class 4 NICs at the same time that she pays any income tax due under Self Assessment – 31 January 2016 for the 2014/15 tax year. The concern is that Margot may not have anticipated this new liability.
This issue is more pronounced if we increase the amounts Margot receives in 2014/15 to £10,000 a week for the 10 week run.
Margot is now required to make payments on account for the 2015/16 tax year. Each payment on account is 50% of the previous year’s income tax liability and Class 4 NICs.
This means that by 31 January 2016 Margot will have to pay Class 4 NICs of £4,214 for 2014/15, plus half this amount again as a payment on account for 2015/16. A total amount of £6,321. Margot may not have set aside the funds to meet this liability in full.
Inability to claim social security benefits
While the old system may have been flawed, it did entitle Margot to claim National Insurance benefits such as Statutory Sick Pay, Statutory Paternity/Maternity Pay and contributions-based Jobseeker’s Allowance. From 6 April 2014 this will no longer be the case.
In addition, her changed status for National Insurance purposes may result in Margot losing out on Universal Credit.
Conclusion
Entertainers will undoubtedly benefit financially from these rule changes. Whether the financial benefit is adequate compensation for the loss of entitlement to social security benefits and increased year-end tax bills, only time will tell.
If you think you could be one of those affected by this change in rules then please contact me.
The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.
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