NIM24605 - Class 4 NICs: computation of liability: profits of a tax year

Class 4 NICs are payable on the profits of a tax year (See NIM24001).

The starting point for the computation of the Class 4 NICs liability is the profit of a trade, profession or vocation which is chargeable to income tax under Chapter 2 of Part 2 of ITTOIA 2005 (paragraph 2, Schedule 2 SSCBA 1992 refers).

There are a limited number of adjustments to this profit.

Admissible deductions

Interest within section 353 ICTA 1988 and annuities or annual payments within section 348 ICTA 1988 or section 349(1) ICTA 1988 may be deducted in computing profits to the extent that they are incurred for the purposes of the trade and have not been allowed in computing trade profit (paragraph 3(5) of Schedule 2 SSCBA 1992).

Inadmissible deductions

No relief is given for:

• personal reliefs (Paragraph 3(2)(a) of Schedule 2 SSCBA 1992),
• retirement annuity relief and superannuation contributions under sections 619 or 620 ICTA 1988 (Paragraph 3(2)(f) of Schedule 2 SSCBA 1992),
• personal pension payments under section 639 ICTA 1988 (Paragraph 3(2)(g) of Schedule 2 SSCBA 1992).

Loans to a partnership

Section 362 ICTA 1988 gives a partner relief from Income Tax under section 353 ICTA 1988 for interest on a loan used to buy into a partnership or to provide money for the partnership.

The interest can only be deducted in arriving at the Class 4 NICs profits where the money is used wholly or exclusively for the purposes of the trade (Paragraph 3(5) of Schedule 2 SSCBA 1992).

No relief is available where the loan was used to buy a share of a partnership from another partner.

Relief is available where the loan is used by the partnership for the purposes of the trade. Examples of this would include where the loan is used as working capital or to finance the purchase of business assets.