Under the current system, self-employed individuals will generally be liable to pay Class 2 and/or Class 4 National Insurance contributions (NICs).
Broadly, Class 2 NICs is a flat-rate, weekly contribution (£2.80 a week for 2015/16), which gives effective entry to the contributory benefits system – including the state retirement pension. Full state pension is paid only to those who have an adequate record of NICs (currently, this is 30 years' NICs, but will rise to 35 years’ NICs from April 2017), so eligibility to pay the relatively low rate of Class 2 NICs is generally perceived to be quite beneficial.
Class 4 NICs, on the other hand, is, in reality, no more than a profit-based tax – there is no attached benefit entitlement and it appears to do little more than increase the total contributions payable by a self-employed individual to bring them roughly into line with an employed earner paying contracted-out Class 1 NICs (albeit without the employer contribution component). For 2015/16, Class 4 NICs are payable at the rate of 9% on profits between £8,060 and £42,385, and at 2% on profits over £42,385.
Recent Changes to Class 2 NICs
From 2015/16 onwards, the collection of Class 2 NICs is through the self-assessment system. This means that Class 2 NICs can now be paid together with income tax and Class 4 NICs in one chunk on the 31 January following the end of the relevant tax year. In the past, most people have paid Class 2 contributions monthly by direct debit. Following the final payment in July 2015, HMRC have cancelled such direct debit payments, ready for the switch over to the new system of payment under self-assessment. However, those who wish to continue paying their contributions more regularly can set up a Budget Payment Plan (assuming they are up to date with their self-assessment payments) and instead make payments weekly or monthly by direct debit in advance of the payment deadlines. Further information on Budget Payment Plans can be found on the Gov.uk website (www.gov.uk/pay-self-assessment-tax-bill/budget-payment-plan).
Prior to April 2015, where a self-employed person also had income from employment which led to the payment of maximum Class 1 contributions (meaning that they would qualify for a refund) they could apply to defer payment of Class 2 NICs until they knew how much, if anything, was due. However, because from April 2015 any liability for Class 2 contributions is not assessed until after the end of the relevant tax year, such individuals no longer need to apply for deferment.
Future changes
At the spring Budget 2015, the government announced its intention to abolish Class 2 NICs in the next parliament. Although few details have been announced to date, it appears that after the abolition of Class 2 NICs, the self-employed will continue to pay Class 4 NIC, but this will be subsequently reformed to include a contributory benefit test.
The proposed changes do raise a few issues – in particular, whilst abolishing Class 2 NICs will be a welcome simplification to the current system, it is essential that a self-employed individual’s contributory benefits entitlement is not eroded by the change. For example, for 2015/16, it is not possible for a sole trader to pay Class 4 NICs unless their profits exceed £8,060; however, they can still make Class 2 NIC payments, even if their profits are below the small earnings exception threshold (£5,965 for 2015/16), and this in turn, will retain entitlement to various contributory state benefits.
Practical Tip:
For those who do not opt to use a Budget Payment Plan, the payment date for the 2015/16 liability (£145.60) will be due on 31 January 2017. Self-employed traders will need to budget for this lump sum payment accordingly.
