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Trade profits
Under the Income Tax (Trading and other Income) Act 2005, which came into force on 6 April 2005, Cases I and II of Schedule D has been replaced by a charge on trade profits. This includes the charge on the profits of a profession or vocation.
Some people pay Class 1 National Insurance on income that is assessable to tax by a charge on trade profits. Class 4 National Insurance is normally payable on all income that is assessed as trade profits from self employment. However, from 6 April 2005 Class 4 National Insurance is not charged on any earnings as an employed earner that are assessed to tax by a charge on trade profits.
On the self-assessment return, all employed earner's earnings, not just those earnings on which Class 1 National Insurance have been paid, should be excluded when calculating the taxable profits for assessing Class 4 National Insurance. There is no liability for Class 4 National Insurance on these earnings. However, this may still be payable on self-employment income that has taxable profits. Class 2 and Class 4 National Insurance will be payable on trade profits from self-employment.
Taxpayers to whom this applies and who may, as a result, pay too much National Insurance, can either:
- apply for deferment of Class 2 and or Class 4 National Insurance; or
- apply for a refund of any overpaid Class 4 National Insurance at the end of the tax year.
Working Together Issue 21, May 2005.
