FHL earnings for National Insurance and pension purposes

Category: Leisure - Posted On: May 2 2022


There has been a lot of media overage surrounding the recent 1.25% increase in National Insurance Contributions (NICs) from 6 April 2022. The increase was applied across both employers and employees NICs and will revert to the previous levels when the new Health and Social Care Levy (HSCL) is introduced from 6 April 2023. How does this tax increase effect FHL operators?

Self employed

FHL earnings made through unincorporated businesses (sole trade or partnership) are not subject to National Insurance and therefore operators will not suffer the increased tax charge. It is crucial FHL income and costs are reported to HMRC in the correct manner as we have seen situations where FHL operators have paid National Insurance on profits by mistake which can be costly.

Private company owners

FHL properties run within a company will only suffer the increased tax charge if the company pays salaries to employees and/or directors. If you think you have escaped the HSCL because you remunerate yourself by dividends, then unfortunately you are mistaken. The rates of tax to be applied to dividend income have also been increased by 1.25%. This means that from 2023 onwards (when the Corporation Tax rate may be 25%) the effective tax rate on extracted profit for a higher rate taxpayer could be 50.3%.

Pensions

Profits made from FHLs are treated as ‘Earned Income’ for tax purposes. This is important if the owner wishes to make pension contributions as any contribution is subject to the level of earned income. Pension contributions can provide extremely valuable tax relief, especially for higher or additional rate taxpayers with targeted contributions providing relief in excess of 46%. This differs from profits on normal letting activities which are not regarded as earnings for pension purposes.

Pension contributions must be actually paid in the tax year in which relief is being claimed so timing is critical and professional advice should be sought at the earliest opportunity.

For more information or to discuss your circumstances, please get in touch with our furnished holiday let specialists by calling one of our offices or emailing leisure@eqaccountants.co.uk.