New look NICs for the self-employed
The self-employed currently pay two classes of National Insurance contribution – class 2 and class 4, explains Sarah Bradford.
Class 2 are flat rate contributions which provide the self-employed with the opportunity to build up entitlement to the state pension and contributory benefits. Class 4 are profit-related and provide no benefit entitlement.
For 2015/16, contributions payable by the self-employed look like this:
|Annual profits||Class 2(£ per week)||Class 4(%)|
|£0 - £5,965 (SPT)||0||0|
|£5,965 - £8,060 (LPL)||£2.80||0|
|£8,080 - £42,385 (UPL)||9%|
At the time of the Summer 2015 Budget the government confirmed it would abolish class 2 NICs and reform class 4 NICs to provide a contributory benefit test. Their proposals are set out in a consultation document (The abolition of Class 2 National Insurance: Introducing a benefit test into Class 4 National Insurance for the self-employed) published in December 2015 on which comments are invited by 24 February 2016.
As of yet no timescale has been given for the introduction of the reforms, although the government has stated it will not be introduced before April 2017.
The stated aim of the reforms is to provide genuine simplification for the self-employed while ensuring that they have access to contributory benefits via the National Insurance system.
Reformed class 4
Under the reforms class 2 will go and the role of providing benefit entitlement will fall to class 4. In order to do this class 4 contributions will be restructured to:
- create a new zero-rate band of class 4 contributions on annual profits between what is currently the small profits threshold for class 2 purposes (£5,965 for 2015/16) and the lower profits limit (£8,060 for 2015/16)
- change the contributions conditions attaching to the state pension and other contributory benefits to enable class 4 contributions (including those payable at the new zero rate) to count towards benefit entitlement
- align the small profits threshold with the lower earnings limit for primary class 1 National Insurance purposes by setting the small profits threshold at 52 times the lower earnings limit. (On 2015/16 figures this would equate to £5,824 (42 x £112))
As a result, class 4 contributions as reformed will mirror primary class 1 contributions as they apply on an annual earnings basis (as for company directors) and will look like this:
|Annual profits||Class 4 rate|
|£0 – Small profits threshold||No liability|
|Small profits threshold – lower profits limit||Liability at zero rate|
|Lower profits limit – upper profits limit||Liability at main rate|
|Above upper profits limit||Liability at additional rate|
As of yet the government has not indicated what the new class 4 rates will be, but as class 4 contributions are not caught by the tax lock it is perhaps likely that the rates, as well as the structure, will be brought into line with primary class 1 contributions.
Winners and losers
Reforms bring winners and losers. The winners are self-employed earners with profits between the small profits threshold and the lower profits limit who will be able to earn state pension and benefit entitlement for free (paying class 4 contributions at the new zero rate).
The losers will be those with self-employed earnings below small profits threshold who currently choose to pay class 2 contributions voluntarily (at £2.80 per week). This option will cease, leaving class 3 contributions (currently £14.10 per week) as the only option for voluntary contributions.
A wider agenda
The Office of Tax Simplification has also recommended greater alignment of tax and National Insurance and getting rid of class 2 and bringing class 4 into line with class 1 arguably brings this one step closer.
The consultation document is available on the GOV.UK website.
Sarah Bradford is the director of Writetax and its sister company, Writetax Consultancy Services. She writes widely on tax and NICs and is the author of National Insurance Contributions 2015/16 published by Bloomsbury Professional.
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Sarah Bradford BA (Hons) FCA CTA (Fellow) is the director of Writetax Ltd (www.writetax.co.uk) and its sister company, Writetax Consultancy Services Ltd. She writes widely on tax and National Insurance contributions and is the author of National Insurance Contributions 2020/21 published by...