Showing posts with label national insurance. Show all posts
Showing posts with label national insurance. Show all posts

Friday, October 14, 2011

Class 4 NI refunds for sleeping partners

A “sleeping partner” is a partner who does not take any part in the running of the partnership’s business. HMRC now accepts that such a partner is not liable to Class 4 NIC, because they do not fall within the definition above. Class 4 National Insurance contributions are paid as a percentage of your annual taxable profits - 9 per cent on profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount.

In the past, there has been a reluctance to classify a partner as a “sleeping partner”, particularly in the case of the standard husband and wife partnership. This was because there was a fear that HMRC would argue that the sleeping partner was not really entitled to their profit share, and that as a result the active partner had made a “settlement” on the sleeping partner by consenting to their having a share of profits they had not “earned”. The fear was that HMRC would therefore seek to tax the active partner on the profits diverted to the sleeping partner – often with the result that those profits would be liable to income tax at 40% instead of the 20% they suffered in the hands of the sleeping partner.