Self-employed NIC merger postponed

Delayed
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Classes 2 and 4 NIC were to be merged from 6 April 2018, with class 2 NIC abolished from that date. This merger will now take place from 6 April 2019.

Delay

In a written statement to the House of Commons released late yesterday, it was announced that the abolition of class 2 national insurance contributions (NIC) would be delayed by one year to 6 April 2019. This delay was justified by a need to consult more fully with interested parties in respect of the effect of the abolition of class 2 NIC on lower earners.  

It’s true that self-employed individuals with profits below the small profits threshold (£6,025 for 2017/18) can currently protect their rights to the state pension and certain other state benefits by paying voluntary class 2 contributions. According to the Office of National Statistics 967,000 people had an annual income from self-employment below the small profits threshold in 2015/16, so it is a significant problem.

Individuals with profits between the class 2 and class 4 threshold (£8,164) pay class 2 NIC at the modest level of £148.20 per year to gain a full year’s NI credit. Paying class 4 NIC currently provides the taxpayer with no NI credits, as it is a pure tax on profits.

Earlier consultation

The proposals to abolish class 2 NIC, and to reform class 4 NIC so it carries all the contributory benefits currently attained with paying class 2, were put forward in the 2015 Budget, and fully consulted on in early 2016.

The Low Incomes Tax Reform Group (LITRG) pointed out in their response to that consultation, that low earning taxpayers would have to pay the more expensive class 3 NIC (£714 for 2017/18), to retain entitlement to the same state benefits. Although there would be a system of NI credits provided for no payment where the individual has profits between the current class 2 threshold and the higher class 4 threshold.

The ATT suggested in its response to the consultation that the need to make a separate class 3 NIC payment would raise barriers for lower earners and discourage them from protecting their state benefit entitlements.

It appears that these questions will now be examined in greater detail by the government, which is a welcome development, but why wait until this late hour? The policy had apparently been decided and all we were waiting for was an announcement of the new (probably higher) rate of class 4 NIC, as part of the Budget on 22 November.

No NIC rises?

Perhaps Philip Hammond got cold feet. After all the last time he announced an increase in class 4 NIC in his Spring 2017 Budget, he had to backtrack as it was perceived as undermining the Conservative manifesto promise not to raise the rates of income tax, national insurance or VAT. Since then we have had another general election during which no similar manifesto promises of freezing tax rates were made, so Hammond should be free to raise the rates of NIC as he wishes.

Of course the retention of class 2 NIC does not mean that the rate of class 4 NIC will not be increased from 9% to 11% or 12%, but it would be a very brave of the chancellor to try.  

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.

Replies

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03rd Nov 2017 10:47

Sounds to me more like HMRC can't get their systems sorted in time for 6 April 2018.

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to jon_griffey
03rd Nov 2017 10:54

They have a system?

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03rd Nov 2017 17:01

FFS, another year of dicking about with class 2.

Who the hell actually cares about class 2, its such a pittance it can't possibly make any difference on the ground to anyone truly self employed.

Even HMRC dont seem to care about it given the apparent huge numbers of tax payers who have not been paying it despite filing SA returns for years.

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to ireallyshouldknowthisbut
03rd Nov 2017 20:19

Maybe they've done the maths and decided that to purchase a state pension for £148.20 per year is a bargain for the taxpayer.

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to ireallyshouldknowthisbut
06th Nov 2017 13:36

Currently class2 is included in the half yearly instalments payable 31 January and 31 July. Separate collection of Class 2NIC ceased on 5 April 2015

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03rd Nov 2017 22:14

"Great". Due to the many cockups they've made in not charging Class 2 on so many clients since it merged with Self Assessment, I thought at least it wouldn't be for long now that the two were merging.

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to SpreadsheetUser
04th Nov 2017 17:17

Surely, now that Class 2 is assessed through the SA tax return (and not via DSS who never tracked who was or wasn't self-employed), everyone due to pay Class 2 is now paying it? Or have you found that some self-employed people with profits above the threshold are still not being assessed to Class 2?

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to charliecarne
04th Nov 2017 22:29

Yes have found some are still not being assessed. When I query this, HMRC say they have no record of the client being self-employed, despite them paying Class 2 for many, many years under the previous system

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to SpreadsheetUser
06th Nov 2017 09:56

Ditto

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to SpreadsheetUser
06th Nov 2017 10:47

@SpreadsheetUser - are they filing self-employment income on that year's tax return? If yes, then how can HMRC not have a record of them being self-employed? If no, then they are not entitled to pay Class 2 NIC.

I agree that the old system was a mess, where a taxpayer could (a) pay Class 2 to DSS even if HMRC had no record of self-employment or (b) NOT pay Class 2, even if filing self-employment income to HMRC, as the HMRC and DSS records were entirely separate. It seems to me that, by making Class 2 assessable and collectable by HMRC on the self assessment tax return, it removes DSS from the equation and thus ensures a simple tie-in between being self-employed and paying Class 2 NIC. What am I missing here?

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to charliecarne
06th Nov 2017 10:13

That's right. They amend the self assessed liability to exclude Class 2 NIC. In a word, they refuse the payment.
I'm not sure that this treatment is legal, but have not yet had time to argue.

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to leon0001
06th Nov 2017 10:35

Same here which is why I was so disappointed when I found out this stupid situation would be carrying on for yet another year.

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to monksview
06th Nov 2017 11:07

THe expected figure for Class 2 is not generated by other entries on the return but whether the Class 2 unit have them registered as self employed. So I have had both scenarios, first that class 2 is a reason to reject a return as theyre not registered and also that they think that class 2 should be there as they have not cancelled a registration for someone who was registered in the past. Of course we have to deal with this and so are effectively "helping" them to sort their databases for free!!

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to coolmanwithbeard
06th Nov 2017 11:34

Thank you, Cool Man! I've learned something new. For some strange reason, I had assumed that ticking the "self employed income" box on the tax return would let HMRC know that the taxpayer was....you know....self-employed, and that all of the NI liabilities associated with being self-employed (Classes 2 and 4) would thus be correctly assessed. I must learn to stop assuming that HMRC would ever do anything that obvious. Thank you :)

I wonder whether anyone has suggested to HMRC that they might like to stop using the old, inaccurate records of the DSS Class 2 unit but, instead, just referred to the same return to see whether the taxpayer was declaring any self-employment income for the year in question (as they do for Class 4). Or is that too simple a solution? It's almost as though HMRC positively look for problems that they can create, even when none need to exist.

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05th Nov 2017 12:43

I wouldn't hold my breath for 2019 either. This project is complex, and it goes beyond contributions regulations: they need to rewrite chunks of the benefits legislation, too.

Resources are at a premium, the few HMRC/HMT specialists with a deep enough knowledge of the NI legislation have other responsibilities or have retired, and a huge IT rewrite will be needed in HMRC and DWP.

Dare I say that Brexit is the main time-sink at the moment? If we crash out of the EU in March 2019 with no transitional arrangements that defer the need for action, we need new HMRC IT systems ready for Day 1, to cope with VAT and customs duty changes, which means they need to be in pilot testing by March 2018 at the latest. Which means they need to be specified in detail now. And the IT resource will not have been helped by the new Chapter 10 rules (public sector IR35) that has caused contractors to leave.

HMRC has long had its resources overstretched just for business as usual, and a hard Brexit will risk breaking them, so it is no surprise that peripheral projects like abolishing a tax worth peanuts to the Exchequer for some imagined simplification benefits has been classed as low priority.

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By rbw
to David Heaton
06th Nov 2017 14:42

David Heaton wrote:

I wouldn't hold my breath for 2019 either. This project is complex, and it goes beyond contributions regulations...

I suspect that the consequential changes of this little policy change were not fully appreciated in the Treasury.

And they are of course as nothing compared with those that would follow from the merger of tax and NICs. Hence (as David Heaton knows far, far better than most) the way that merger is often touted by those who don't want to know about the problems. Sometimes even by Ministers of the "don't bring me problems, bring me solutions" school - who change their mind when presented with the price tag (money or political) on the solutions.

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05th Nov 2017 19:47

Surely, they've solved a lot of the NIC issues (i.e. cost of collection, different databases etc) by including it in SA. Why not just leave it as it is now, i.e. computed and collected via SA returns. Seems counter-intuitive to change the system again so quickly.

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06th Nov 2017 10:02

Perhaps if Tyne and Wear were to declare independence all this nino nonesense would disappear.

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06th Nov 2017 10:38

Could they not predict that everything is going to take longer with Brexit looming and stop publishing unrealistic timeframes that they then have to postpone?

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06th Nov 2017 11:30

I had hoped the 2015-16 C2NIC fiasco would not be repeated for 2016-17. Sure enough, it is less of a fiasco, more just a normal HMRC pain in the neck because there are still HMRC errors but on a lower scale.

Postponing the abolition of C2NICs is no doubt because HMRC have realised they won't be ready in time but despite the ongoing SA C2NIC problems I welcome the postponement. My reason is because I have many low earners who have income below the SPT and being low earners are not in a position to pay C3NICs. Some will get free C3 NI credits because they receive Working Tax Credit but most will not.
I'm also concerned about by farming clients. For example, low profit 2019-20 no C4NICs due, high profit 2020-21 which they average with 2019-20 they end up paying C4NICs for other years but only get the C4NICs credited to their entitlement record for 2020-21. They too would have to pay C3NICs for 2019-20 to get the entitlement even though they have paid the full C4NICs for both years.

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06th Nov 2017 13:09

I had the situation where they did not collect my Class 2 NIC for 2015/16 and 2016/17. We finally tracked down the fact that I had worked out of the country in the '80's and so apparently I wasn't here!! I had a full NI history from 1986 either through PAYE or Self-employment but the Class 2 was paid by direct debit - apparently a different system! HMRC registered me (or should I say re-registered me) as self-employed from 2015/16 so that I am now here!!!!

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to janetmwhite
06th Nov 2017 13:45

Just shows that everyone who has been self employed at any time needs to check their state pension forecast and make sure that every year that contributions have been paid are accounted for.

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