Self-employed earners (i.e. sole traders or partners) over the age of 16 and below state retirement age are currently liable to both Class 2 and Class 4 National Insurance contributions (NICs) unless specifically excepted by provisions contained in the Social Security Contributions and Benefits Act 1992.
Former Chancellor, George Osborne, made proposals to abolish Class 2 NICs and reform the system for paying Class 4 NICs. The proposals were designed to simplify the tax system for the self-employed and offer them more equal access to contributory benefits. However, the Treasury recently announced that it will not now proceed as planned with the abolition of Class 2 NICs, which was originally scheduled for April 2018, then delayed to April 2019. It is estimated that by not going ahead with the planned changes, the government will save some £360m for each of the three years to 2021 based on the original impact assessment.
Paying Class 2
In broad terms, Class 2 contributions are the entry fee that self-employed people pay to enter the contributory benefits system.
The newly self-employed must notify their liability to pay Class 2 contributions to HMRC. Penalties may be imposed for failure to notify chargeability.
Class 2 contributions are payable at a flat weekly rate – £2.95 per week in 2018/19.
From 2015/16 onwards, Class 2 contributions are collected through the self-assessment system, which means that they can be paid together with income tax and Class 4 NICs in one process on the 31 January following the end of the relevant tax year.
Those who want to pay their contributions more regularly can set up a Budget Payment Plan (assuming they are up to date with their self-assessment payments) and make payments towards their final tax and NICs liability weekly or monthly by direct debit in advance of the payment deadlines.
As indicated above, liability for Class 2 NICs is reported through self-assessment. Those that report profits below the small profits threshold (SPT), £6,205 for 2018/19 (£6,025 for 2017/18), are not liable for Class 2 NICs, although they can pay voluntarily to protect their entitlement to contributory benefits.
For these purposes, ‘profits’ has the same meaning as given for Class 4 NICs, which broadly, means the charge is based on ‘all profits … immediately derived from the carrying on or exercise of one or more trades, professions or vocations … chargeable to income tax under ITTOIA 2005, Pt. 2, Ch. 2 for the year of assessment and [which] are not profits of a trade, profession or vocation carried on wholly outside the UK’.
Exchequer secretary to the Treasury, Robert Jenrick, recently made a written ministerial statement in which he said that, after reviewing evidence concerning the impact on self-employed individuals with low profits, the government will not proceed with the Class 2 NICs changes.
Mr Jenrick said that ‘a significant number of self-employed individuals on the lowest profits would have seen the voluntary payment they make to maintain access to the state pension rise substantially.
Having listened to those likely to be affected by this change we have concluded that it would not be right to proceed during this parliament, given the negative impacts it could have on some of the lowest earning in our society.
Furthermore, it has become clear that, to the extent that the government could address these concerns, the options identified introduce greater complexity to the tax system, undermining the original objective of the policy.’
However, Mr Jenrick went on to say that the government remains committed to simplifying the tax system for the self-employed, and will keep this issue under review in the context of the wider tax system and the sustainability of the public finances. He also confirmed that the government still intends to legislate for reforms to the NICs’ treatment of termination payments and income from sporting testimonials, which were set out in the draft NICs Bill published on 5 December 2016.
There is currently speculation that Chancellor Philip Hammond will take the Autumn 2018 Budget as an opportunity to raise NICs’ rates. Future changes in this area may be expected.