National Insurance for Self-Employed people is changing over the next couple of years.
Currently, anyone who is self-employed pays National Insurance in two ways: Class 2 NIC. It is this class of NIC that counts towards pensions and certain other contribution-based social security benefits. This is paid at the flat rate of £2.85 per week. Liability begins in the week when someone starts self-employment and similarly ends in the week when self-employment ceases. Liability is notified to HMRC by completing form CWF1.
Payment of Class 2 NIC is compulsory if profits exceed the small profits threshold which currently stands at £6,025 per annum. This limit is reduced pro-rata if someone is self-employed for less than the whole year. Below that limit payment is voluntary. However, it may be advantageous to pay this to protect benefit rights if profits are below this level as the voluntary class 3 NIC is currently £14.25 per week. Therefore, a self-employed person on small profits can maintain his/ hers contribution record for £592 less each year than someone who is not self-employed. Liability to Class 2 NIC ceases when a person reaches state pension age
Whilst it is calculated on a weekly basis, Class 2 NIC is payable on 31st January following the year of assessment together with the remainder of the person’s tax liability. Class 4 NIC. This is profit related and is currently payable at a rate of 9% on profits between the lower and upper earnings limit, which are currently £8,164 and £45,000 respectively. Whilst this is considerably more than Class 2 NIC it does not confer any pension or benefit entitlement. This is collected through the self-assessment tax system together with any income tax liability.
However, from April 2018 the above is due to change. Class 2 NIC will be abolished from that date and from that date it will be the Class 4 NIC contribution record that will determine pension and benefit entitlement. Following the Spring budget you may recall from an earlier column that the rate at which Class 4 NIC is payable was due to increase to 10% from April 2018 and 11% from April 2019. However, these increases broke “promises” that were in the election manifesto and were cancelled after the resulting outcry. However, the promises were not renewed at the recent surprise General Election and we are due for another budget in the Autumn. We must await any changes that may be announced then.
If you need advice or if there is something specific you would like to discuss, please get in touch.