In a surprise announcement on 6 September, the Treasury confirmed that class 2 NIC would not be abolished from 6 April 2019 as had been on the cards since 2017.
National insurance contributions (NIC) for the self-employed are unreasonably complicated. The two classes (2 and 4) are paid on different bands of income, and at different rates.
Class 4 costs the individual more (no upper limit) but provides no right to state benefits, it is a pure tax on profits. Class 2 costs a maximum of £153.40 per year (for 2018/19) but it does provide some entitlement to the state pension and certain other state benefits.
The system is a mess, so back in July 2013 (over five years ago!), the government launched a consultation into simplifying NIC for the self-employed. Some streamlining of payment methods was achieved, with class 2 now collected alongside class 4 with income tax paid under self assessment, but the long-term aim was the merge the two classes.
To merge or or to merge
The class 2 & 4 merger was to take effect from 6 April 2018, but in November 2017 the effective date was pushed back to 6 April 2019. Yesterday’s written statement from Robert Jenrick, Exchequer Secretary to the Treasury, confirmed that the merger of class 2 and 4 now won’t happen, as class 2 NIC will not be abolished.
The reason given for this U-turn is; “A significant number of self-employed individuals on the lowest profits would have seen the voluntary payment they make to maintain access to the State Pension rise substantially.”
This is not credible as the proposed merged class 4 and 2 NIC was to include a mechanism to solve that problem. Those on low profits would have been given a credit towards the state pension without having to pay any NIC at all. This would have operated in a similar fashion to the NI credits for employees who earn between the lower earnings limit (£116 per week) and the primary threshold (£162 per week).
Good news for expatriates
Individuals who have been resident in the UK for at least three years, and paid into the national insurance system, can continue to make NI contributions by paying class 2 NIC when they move abroad. This is a very useful way for non-resident individuals to build up qualifying years towards to the UK state pension (see Social Security abroad NI38).
The proposed abolition of class 2 NIC was to remove this low-cost route to add credits to their UK state pension entitlement. Those expatriate individuals would have had to change to paying voluntary class 3 NIC, which costs £761.85 per year compared to £153.40 for class 2 (2018/19 rates)
Rise in Class 4 NIC?
Philip Hammond proposed an increase the rate of class 4 NIC in his first Budget in 2017, from 9% to 10% in 2018, then to 11% in 2019. But there was uproar from “white van man”, as the Conservative Party manifesto had promised there would be no increase in NIC. So Hammond had to back down and there was no increase in the rate of class 4 NIC.
The Conservatives were careful not to make any rash promises about tax rates before the 2017 election, so now the Chancellor should be free to raise NIC rates as he wishes. Will class 4 NIC rise in 2019; perhaps increasing the rate above the upper profits limit (introduced by Gordon Brown) from 2% to 3%?
The burden of increased NIC normally falls on employees and employers, so perhaps we will see increases in the rates of classes 1,1A and 1B NIC. We should find out in the Autumn Budget - whenever that is.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.