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.
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.
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.