NIC and the self-employed
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.
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 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 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.
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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.
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%.
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...