NIC and the self-employed

Tax return and employment
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Sarah Bradford
Director
Writetax Ltd
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Sarah Bradford watched the latest HMRC Talking Points webinar on NIC and the self-employed, to find about the NIC reforms, but she was disappointed.

Reform is coming

There are big changes on the horizon as far as National Insurance contributions for the self-employed are concerned. The government plans to abolish class 2 National Insurance contributions from 6 April 2018 and to reform class 4 from the same date, to provide the mechanism by which the self-employed build up entitlement to the state pension and certain contributory benefits.

Although these reforms are less than eight months away, discussion of what they entail was not on the agenda during the HMRC webinar. The HMRC panel would not take questions about the NIC reforms - the excuse given was that the legislation is not final. Instead, the webinar focussed on the NIC regime as it currently applies.

Registration

The self-employed currently pay two classes of national insurance – class 2 and class 4. By law, a person is required to notify HMRC when self-employment starts, and also when it ceases. Registering for NIC can be done at the same time as for tax – this can be done by completing form CWF1 which can be done entirely online or by completing an interactive form, which once completed is  printed to be submitted by post. The applicant must have a national insurance number before completing form CWF1.

Class 2

Class 2 contributions are payable for each week of self-employment from the age of 16 to the worker reaches state pension age. The rate is a weekly rate – set at £2.85 per week for 2017/18. A liability to class 2 only arises if profits from the self-employment exceed the small profits threshold – set at £6,025 for 2017/18. Where profits are below this level, the self-employed earner is eligible but not liable to pay. This gives the option to pay class 2 contributions voluntarily. This may be beneficial where the earner needs qualifying years as class 2 at £2.85 per week is considerably cheaper than voluntary class 3 contributions, which currently cost £14.25 per week.

Although calculated at a weekly rate for each week of self-employment, class 2 contributions are now paid annually via the self-assessment and are due by 31 January following the end of the tax year to which they relate, so 2017/18 class 2 contributions must be paid by 31 January 2019.

When working out the annual liability for class 2, the weeks of self-employment include those when the worker was on holiday or weeks when the worker had no work but was available for work, as the self-employment does not cease when the worker has a week off.

Liability for class 2 contributions comes to an end in the week in which the worker reaches state pension age. However, depending on the earner’s contributions record it may be worthwhile paying class 2 voluntarily for the remainder of the tax year once state pension age has been reached so that the year counts as a qualifying year.

Class 2 contributions currently accrue an entitlement for the taxpayer to the state pension, maternity allowance (at the standard rate), bereavement support allowance and contributory employment and support allowance. This contributory role of class 2 is due to pass to class 4 from 6 April 2018 when class 2 is abolished.

Class 4

Class 4 contributions currently carry the attributes of income tax, in that they currently do not confer any pension or benefit entitlement. Class 4 is payable at the main rate of 9% on earnings between the lower profits limit, set at £8,164 for 2017/18, and the upper profits limit, set at £45,000 for 2017/18, and at the additional rate of 2% on earnings above the upper profits limit.

Profits for both class 2 and class 4 purposes are computed as for tax purposes.

As with class 2, class 4 contributions are payable via the self-assessment system and are due by 31 January after the end of the tax year to which they relate. However, unlike class 2, class 4 contributions are taken into account in computing self-assessment payments on account.

The future

Class 4 contributions are due to be reformed from 6 April 2018 and following the abolition of class 2 they will become the means by which the self-employed earn entitlement to certain state benefits and pension contributions. The reformed class 4 as outlined by the government looks a lot like class 1 as applied on an annual earnings basis.

As regards the rate of reformed class 4 – it is a case of watch this space. After announcing in the spring 2017 Budget that the class 4 rate would increase to 10% in 2018 and then to 11% the following year, the government performed a swift U-turn and, for now at least, the rate seems to be remaining at 9%. 

About Writetax

About Writetax

Sarah Bradford BA (Hons) ACA 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 2015/16 published by Bloomsbury Professional. She can be contacted at [email protected],

Replies

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10th Aug 2017 14:46

Can anyone tell me this:
I have a client who is self employed and has a year end of 31st December. The client will reach state pension age in March 2018. Which is the last year for Class 4 NIC - the basis period (Jan - Dec 2018) or the tax year to 5th April 2018 (basis period Jan - Dec 2017)?
Thanking you.

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to gracegariff
10th Aug 2017 15:57

Class 4 NIC is due for the tax year in which they reach state pension age. So that will be the 2017-18 tax year, which will be based on the accounts for the year to 31 December 2017.

Class 4 will not be due for the 2018-19 tax year, which will be based on the accounts for the year to 31 December 2018.

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10th Aug 2017 15:40

Seems a bit pointless for them to hold a webinar on a subject the content of which will soon be obsolete.

Thanks (4)
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to SteLacca
11th Aug 2017 09:09

My thoughts exactly, it feels like a very short-term way of focussing whereas we need a more longer-term outlook on where National Insurance is going.

Thanks (2)
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to SteLacca
11th Aug 2017 10:54

SteLacca wrote:

Seems a bit pointless for them to hold a webinar on a subject the content of which will soon be obsolete.

In my experience, most of these HMRC webinars are pointless. The speakers rarely understand their subject in depth and can answer only the most basic of subjects that have already been covered by the webinar script. Agent webinars are set at entry level and add very little to technical knowledge.

Thanks (6)
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By hiu612
to Paula Sparrow
11th Aug 2017 14:44

I tend to agree, but did attend the talking points trust registration service webinar earlier in the week, which had a clearly knowledgeable and well presenting speaker, and where there was a 30 minute Q&A session during which he mostly answered the questions well.

Perhaps its the exception that proves the rule.

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to hiu612
11th Aug 2017 15:47

Definitely an exception, I attend quite a few of these and the Q&A are usually hopeless with the 'expert' not actually understanding the question being asked, let alone how to respond to it. I occasionally find the presentation itself useful, but probably nothing I couldn't find in 10 minutes with a bit of research. Starting to think wasting an hour on these webinars is not the best use of my time.

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to SteLacca
11th Aug 2017 11:23

Possibly, but considering some questions posed at the end it may achieve its end in part.

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11th Aug 2017 09:18

Interesting that the £45K ceiling on class 4 upper limits is exactly the same level as that for company's pension auto enrolment levels - would if this is just a back door way of trying to boost the government's pension income?

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11th Aug 2017 11:06

Why did HMRC go to all the expense and trouble of changing the way class 2 was collected only to abolish it.
And why do they still keep sending me tax calculations taking class 2 away from self-employed clients who are due to pay it.
And why . . . . .

Thanks (5)
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11th Aug 2017 11:08

What a waste of time faffing around - why don't they just reform the whole system and incorporate NI into tax and have done with it! The only reason we seem to have all this unnecessary complexity is to provide work for civil servants.

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to dmmarler
11th Aug 2017 11:20

dmmarler wrote:

What a waste of time faffing around - why don't they just reform the whole system and incorporate NI into tax and have done with it! The only reason we seem to have all this unnecessary complexity is to provide work for civil servants.

Do you REALLY believe that? There is a really good debate to be had about incorporating NI and Income Tax but if we, as the professionals, aren't capable of more than silliness like this then we can never expect reform. It is beneath us. The politics involved in this change would be horrible for whoever attempted it and it should be our role to help think through those challenges rather than resort to ill-informed soundbytes.

You really should read the OTS report on this subject and you will see exactly why it is difficult despite being contemplated since the mid-80s by Nigel Lawson.

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to Wild Billy
12th Aug 2017 15:11

Yes, I really believe it. Yes, I did read the OTS report. The OTS was not charged with restructuring our taxes into a more efficient system, but had a tight and unhelpful brief. Yes the politics are horrid, but not insurmountable. This is not "silliness", this is trying to stop UK plc having to waste time (and money) on unproductive activity, including accountancy advice. It is not beneath us to give advice which is contrary to our own personal interests as accountants.

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11th Aug 2017 11:16

HMRC are consistently ignoring/returning declarations/payments of class 2 NICs via self-assessment. Anyone had a similar experience? Surely if they introduce this as a mechanism to declare and pay class 2 NIC's why is it not applied in practice??

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By janefg
11th Aug 2017 13:02

Under the reformed Class 4, will clients whose income falls below the trigger point have to pay Class 3 contributions if they want to secure their State Pension?

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11th Aug 2017 15:44

I attended this webinar - an hour of my time I'll never get back. Not only was subject matter useless but their technology didn't work, and the Q&A session was excruciating with inaccurate responses given by the 'expert'.

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By raju m
12th Aug 2017 12:26

I took half a day off to find out about new changes coming to NIC. Like others, I was very disappointed with the seminar. However, to be fair to HMRC, there has been some useful and informative webinars in the past.

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14th Aug 2017 08:21

Reform is coming

We all know the changes are designed to raise more money for the treasury, I believe this was some of the last legalisation proposed by Gorge Osborne.

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