George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Inconvenient truth: National Insurance U-turn saves self-employed £608 a year

News that Class 2 National Insurance contributions (NIC) for the self-employed were not to be abolished after all was greeted with a mixture of derision and protest. 

Derision because the March 2017 plan to scrap these contributions with effect from April 2018 had already been postponed to April 2019. And protest because it was widely thought that scrapping the contribution of £2.95 per week would have provided a modest if welcome benefit for the lowest-earning self-employed people.

Now for some unwelcome truths.

The lowest earners among the self-employed are already exempt from Class 2 NIC. These contributions are only payable if a person's profits are £6,205 or more a year.

When the Government initially announced it was scrapping Class 2 NIC, it never made it clear what would replace it.

Class 2 NIC count towards a person's entitlement to the basic State pension, the new State pension, contribution-based employment and support allowance, maternity allowance and the bereavement support payment. 

So unless the Government spent a lot of time and effort changing the rules relating to Class 2 NIC in order to protect lost pension entitlements, the abolition of Class 2 NIC would have forced the self-employed to protect their contribution record by paying voluntary contributions. 

In the past, gaps in a person's Class 2 record could have been filled by paying the rate from the year covered by the contribution, currently £2.95 a week. But if Class 2 NIC had been abolished on 5 April 2019, it seems that the self-employed would have had to pay voluntary Class 3 contributions from 6 April 2019 to protect their entitlement to State pension. And guess what – now at £14.65 week, Class 3 contributions are almost five times the amount payable under Class 2.

As Parliament had neither the time nor, apparently, the inclination to address these complexities – especially as NIC is in urgent need of wider reform, not least because many of its curious features underpin the gig economy – the decision not to scrap Class 2 NIC should be a cause for rejoicing by the self-employed who would otherwise have had to pay an extra £608 a year under Class 3 for fewer benefits than they enjoy under Class 2. 

 

Add comments

Related services

Share your thoughts

*These fields are mandatory

Comments