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Confusion springs from NIC threshold amends

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The Spring Statement has left some self-employed traders with a bewildering class 2 NIC credits situation that varies according to their total trading profits for the year.

29th Apr 2022
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The Chancellor sprang a surprise on us in his Spring Statement on 23 March 2022 by changing the thresholds where national insurance contributions (NIC) is payable by individuals, for NIC classes 1, 2 and 4. The class 2 and 4 thresholds are finally aligned, and full alignment with the income threshold for income tax will be achieved from 2023/24.   

This is a welcome simplification, but the alignment of these thresholds has created further problems for those on low incomes.   

For 2022/23, self-employed individuals will only be required to pay class 2 and class 4 NIC on profits above £11,908. From 2023/24 class 2 and 4 NIC will be payable on profits above £12,570 per year. 

I attempted to set out what you need to know about these changes to all classes of NIC, but questions remained.    

To pay or not to pay 

In Any Answers, John R was quick to ask whether self-employed individuals, who have profits below the small profits threshold (£6,725 for 2022/23), could carry on paying voluntary class 2 NIC

Although class 2 NIC is only charged at the flat rate of £163.80 per year (£3.15 per week), paying it allows the individual to maintain a full NI contribution record and so build up entitlement to the UK state pension and certain other state benefits. Paying class 4 NIC provides no entitlement to state benefits as it is a pure tax with no contributory element.

Those self-employed individuals who make a loss or very small profits have the option of paying class 2 NIC on a voluntary basis. Although getting the HMRC system to acknowledge this “debt” for class 2 NIC can be an uphill struggle. In some cases HMRC will erroneously refund the class 2 NIC paid, back to the taxpayer.      

Not missing out 

To ensure that those low-profit self-employed traders are still able to maintain their NIC record, the government invented a new class 2 NI credit. However, this credit only replaces the right to pay class 2 NIC on profits between the small profits threshold (£6,725) and the lower profits limit (£11,908), where class 2 and 4 NIC must be paid.    

Where the taxpayer has profits lower than £6,725, or a loss, they will need to pay class 2 NIC on a voluntary basis for 2022/23 and presumably for 2023/24. This leads to the slightly crazy situation as set out in the table below.   

 

Profits in band:  Class 2 NIC payable: 
Up to £6,724 Voluntary NIC: £163.80 per year 
£6725 - £11,907 NI Credit given: zero payable 
£11,908 or more  Compulsory NIC: £163.80 per year 

 

To be eligible for the class 2 NI credit, the taxpayer must report self-employed profits at least equal to the class 2 small profits threshold of £6,725, on their self-assessment tax return for 2022/23. 

Treatment of losses

The treatment of self-employed losses can be confusing for class 4 NIC. 

Where trading income losses are relieved against the taxpayer’s other non-trading income of the same year, or the previous year, this does not use up income that was subject to class 4 NIC. The losses must be carried forward for class 4 NIC purposes (see HMRC National Insurance manual NIM 24610). 

Where the class 4 NIC loss is carried forward it reduces the profit assessed for class 4 NIC in the next tax year. 

The tax return software should capture this class 4 NIC loss, but if it doesn’t, you should make a record of this carried-forward loss for your client.

Replies (9)

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By Eighties Kid
29th Apr 2022 13:57

In the tax talk Rebecca Benneyworth advised to not claim mileage etc to increase profits to enable an NI credit.

Do you agree with this?

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Replying to Eighties Kid:
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By Hometing
03rd May 2022 16:14

As I've thought with the endless mortgage application requests, not claiming expenses (whilst better for the taxman) is not an accurate reflection of the profitability of the business

Thanks (1)
Replying to Hometing:
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By philaccountant
04th May 2022 17:04

Not sure how much of a mortgage you're going to get on £6k of profit, but if you can find a lender let me know.

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ALISK
By atleastisoundknowledgable...
30th Apr 2022 11:02

I think anyone making £6,600 might decide some expenses are personal, or someone making £12k might find £100 expenses.

Someone with more time will work out the actual tipping points.

Thanks (1)
RLI
By lionofludesch
30th Apr 2022 11:27

Poorly thought out blocks, once again.

Thanks (2)
Should Be Working ... not playing with the car
By should_be_working
04th May 2022 10:18

Off topic, sorry, but it's bugging me:

"Confusion springs from NIC threshold *amendments* "

Thanks (2)
Replying to should_be_working:
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By Andy L
04th May 2022 14:36

They could have just used "changes" and be done with it..

Thanks (1)
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By Jamie Thompson
04th May 2022 10:23

My reading of the National Insurance Contributions (Increase of Thresholds) Act 2022, is that anyone with profits of below the NIC threshold gets credit.

"Regulations under this section may—
(a)also make provision having the effect that, in such circumstances as may be provided for, a person whose profits for a tax year are less than that threshold is treated as making Class 2 contributions"

If that was the case voluntary class 2 NIC would then become redundant?!

Thanks (0)
Morph
By kevinringer
04th May 2022 20:16

I think HM Government forgot voluntary Class 2 existed when the Spring Statement was announced. Firstly, there was no mention of it in the speech. Secondly, there was no mention of it in the documents published afterwards. Thirdly, I raised it on HMRC's Agent Forum to which HMRC responded "At present we are unable to answer your queries as the finer details of the Spring Budget announcement which are still being discussed by the project team. Guidance will be issued a soon as possible via the usual channels." I don't regard voluntary class 2 as "finer details". If HMG forgot about the existence of voluntary class 2, what else have they forgotten about?

Thanks (1)