This month, the government announced that they would be postponing the abolition of Class 2 National Insurance Contributions until 6th April 2019. This comes after The Low-Income Tax Reform Group of the Chartered Institute of Taxation succeeded in their almost two-year long campaign to delay the decision.
The group, who describe themselves as the voice for the unrepresented, aim to combat the proposal that could cost many low-earning self-employed workers more than £600 extra per year.
Who has to pay Class 2 National Insurance?
Class 2 National Insurance is paid by self-employed people in the UK who make a profit of more than £6,024 each year. Those who bring in over £8,164 a year also have to pay Class 4 insurance on top of their Class 2 payments.
Your profits count as your earning minus allowable expenses which is usually determined on your self-assessment form. If this number falls below the £6,025 threshold, you don’t have to pay any National Insurance at all.
However, many people who are exempt from paying Class 2 contributions may choose to do so voluntarily.
Why do people choose to pay voluntary Class 2 National Insurance?
If you don’t pay any National Insurance, you’re not entitled to certain benefits. Many self-employed people under the profit threshold for Class 2 NI choose to pay contributions voluntarily in order to qualify for:
- Basic state pension,
- New state pension,
- Contribution-based employment and support allowance,
- Maternity allowance,
- Bereavement pay,
- Bereavement allowance,
- Widowed parent’s allowance, and
- Bereavement support payment.
Data released earlier this year by the Office for National Statistics stated that there were more than 967,000 self-employed people under the small profits threshold in 2015-16.
Those in this category would otherwise be unable to access the above financial support if not for their voluntary Class 2 National Insurance Contributions (NICs).
How much does it cost now?
Class 2 National Insurance is currently payable at a flat rate of £2.85 per week for those within the Small Budget Threshold, earning between £6,025 and £8,164 a year.
This comes to £148.20 per year under the current system.
What was the original proposal?
The Exchequer announced their proposal that Class 2 National Insurance be abolished way back in the 2015 Summer Budget.
This was suggested as a way to ‘simplify the tax system’, both by making NICs more transparent and easy to understand for the tax payers, and to simplify the administration of contributions.
How much would it have cost if it had been brought in?
In the proposal it was suggested that, after the abolition, those currently liable to pay Class 2 NI would not be liable to pay Class 4 contributions. But they would be treated as though they had in regard to accessing contributory benefits like state pension and maternity allowance.
Unfortunately, for self-employed workers falling under the small profits threshold, paying voluntary Class 2 NI to be entitled to said benefits will no longer be an option. Britain’s lowest-earning self-employed workers will instead have to pay £593 more per year than their previous bills.
You will have to pay Class 3 voluntary contributions in order to access state pension and other benefits, which at current rates stands at £741 per year. That amounts to a 400% increase on their NICs. That’s a change from £2.85 to £14.25 each week for self-employed people on a considerably low income.
Why has it been delayed?
Despite initial plans to abolish Class 2 NICs in April 2018, the government has now said it will defer the move to April 2019.
The Treasury has said that whilst they are determined to abolish Class 2 NICs to simplify the system, they want to take the time to ensure there are no unintended negative consequences on low-earning self-employed workers. The delay is said to give the Treasury more time to engage with MPs and campaigners about how people will be affected.
The Low Incomes Tax Reform Group have said the delay is a “welcome announcement that shows the government is listening” to people’s concerns.
What are the effects of the delay?
During the year delay, self-employed workers with profits under £6,025 will save £593 until 2019, but for those currently liable to pay Class 2 NI, it’ll cost them £148.20 more than if it had been abolished.
Income from self-employment can be variable at the best of times however the delay in implementing the abolition of Class 2 NI is to be welcome. To discuss all things NI, please call us on 01202 577500 or email us at [email protected].