IOM To Cut Compliance Burden On Self-Employed

by Jason Gorringe, Tax-News.com, London

26 January 2012

The Isle of Man Treasury has launched a consultation which proposes improvements to the collection of National Insurance contributions, to bring the Income Tax and National Insurance systems into alignment where possible.

As a first step in this process, the Income Tax Division is consulting on changes to the payment of Class 2 National Insurance contributions.

The consultation document proposes to move Class 2 contributions to one payment per year and proposes that the level at which a person becomes liable to pay Class 2 contributions is raised to match the Class 4 contributions lower profit limit.

Before April 2010, Classes 1, 2 and 3 National Insurance Contributions were collected by the then Department of Health & Social Security, and Class 4 Contributions were collected by the Income Tax Division. Following the restructuring of the government in 2010, the Division became responsible for the collection of all classes of Contributions.

Class 2 Contributions are paid by self-employed earners. In practice, this generally means someone who has their own business. In addition to Class 2 Contributions, Class 4 Contributions are payable at a set percentage rate on profits from self-employment which exceed a lower limit of GBP5,980 (USD9,304) per year.

The document explains that the government considers the current method of collecting Class 2 Contributions is, for such small amounts (GBP2.50 per week, or GBP130 per year), overly bureaucratic, and it is therefore proposed that the collection of Class 2 and Class 4 Contributions should be aligned.

Class 4 Contributions are collected annually with income tax. The standard system is that, following assessment of the income shown on a self-employed person’s tax return for the previous year to April 5, any balance of income tax and Class 4 Contributions must be paid no later than the following January 6. There may be no balance or it may be small, because payments on account of tax and Class 4 Contributions are also due on January 6 for the current tax year which carry forward to the assessment for that year once the person’s tax return has been submitted.

It is proposed that self-employed people should pay their Class 2 Contributions for the whole of the tax year at the same time as their Class 4 Contributions payment on account: i.e. on or before January 6 in the tax year.

Where it is known that someone will not be self-employed for the whole of the year, e.g. they reach state pension age or they become an Incapacity Benefit recipient, the amount of Class 2 Contributions which they are asked to pay will reflect this, the government confirmed.

A consultation period is to run until March 2, 2012, to allow for feedback from stakeholders.

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