Under current rules, self-employed taxpayers making low profits (below £6,205 pa for 2018/19) are exempt from paying Class 2 National Insurance, but can choose to pay it voluntarily.
Class 2 National Insurance Contributions for the 2018/19 have been set at £2.95 per week (£153.40 per annum), and this must be paid by all self-employed taxpayers and partners in partnerships/LLPs. Since April 2015 Class 2 NICs have been collected via self-assessment, alongside tax and Class 4 NICs.
However, where profits are below the Small Profits Threshold, which is £6,205 pa for the 2018/19 tax year, taxpayers are exempt from paying Class 2 NICs.
So, why bother? Paying Class 2 NIC provides a contribution year towards state pension and other state benefits. To achieve a full state pension upon reaching state retirement age requires 35 contribution years. Once you come to retire you can make Voluntary Class 3 National Insurance Contributions to make up any shortfall of contribution years, but these are set at the rate of (currently) £14.65 per week (£761.80 per annum), which is considerably higher than Class 2 rates.
Class 2 NICs therefore represent a ‘cheap’ way to achieve a contribution year for those with low profits, and we always actively encourage clients in these circumstances to pay Class 2 NICs voluntarily.
So, what’s changing? From April 2019 Class 2 NICs are set to be abolished, with state benefits to be linked to Class 4 NICs instead of Class 2 NICs. The self-employed already pay Class 4 NICs once their profits exceed the NIC threshold of £8,424 per annum (for 2018/19), but these are effectively an extra ‘tax’ and don’t contribute to any benefits. This is set to change from April 2019 onwards.
Under the new regime the operation of Class 4 NIC will be aligned with Class 1 NIC for employees, whereby contributions don’t need to be made until the NIC threshold is exceeded (currently £8,424 per annum), but where profits exceed the lower earnings limit (currently £6,032 per annum) then it will count as a contributions year.
The new system will benefit those with profits between the lower earnings limit and the NIC threshold (i.e., those with profits between £6,032 and £8,424 per annum), since they will achieve a contributions year towards state pension and benefits without paying any NIC at all.
However, for those with profits below the lower earnings limit (currently £6,032 per annum) there will not be the option to pay NICs voluntarily. As a result, those with low profits will have to consider paying higher Class 3 NIC rates to make up any missing contribution years.
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