National Insurance changes – winners and losers

Tax campaigners have warned that the abolition of Class 2 National Insurance contributions from April 2018 could result in the lowest earners among the self employed being hardest hit.[a]

Class 2 NICs are flat-rate weekly contributions paid by the self-employed to gain access to contributory benefits. The self-employed also pay Class 4 NICs on profits above the Lower Profits Limit. Class 4 NICs do not currently give access to contributory benefits. At Autumn Statement 2016 the Chancellor confirmed that Class 2 contributions would be abolished from 6 April 2018.[b]

At present, self-employed earners whose profits exceed £5,965 a year, the small profits threshold (SPT), are required to pay Class 2 NI contributions at £2.85 a week. These contributions then count towards their state retirement pension and entitlement to certain other contributory benefits. If their profits fall below the SPT, they have the option to make voluntary Class 2 payments.

When Class 2 is abolished, payment of Class 4 NI contributions will count towards state benefits. In order to protect some people on low incomes, Class 4 contributions will not be payable until annual profits reach £8,060. However, as long as profits exceed the SPT, the self-employed will be given Class 4 credits, so they will be treated as making contributions even though none was actually paid.

A point to note though is that, unlike Class 2, Class 4 NI cannot be paid on a voluntary basis meaning that the only way that self-employed people on profits below the Class 4 threshold will be able to build up a contribution record, if they did not obtain NI credits through receipt of other benefits, eg tax credits, child benefit or Universal Credit, will be by paying Class 3 voluntary contributions at £14.10 a week.[c][d]

Anthony Thomas, Chairman of the Low Income Tax Reform Group commented:

‘Some parts of these proposals are good news for self-employed workers on low earnings, but by no means all. Those with profits between £5,965 and £8,060 will be better off because they will pay no NI but be credited with contributions. Our concern is for those with lower earnings than £5,965 who would have to pay voluntary Class 3 contributions in the future to protect their benefits entitlement if they did not obtain NI credits through receipt of other benefits, for example tax credits, child benefit or Universal Credit. Class 3 contributions will cost almost five times the amount they are paying now (£14.10 per week compared to £2.85 per week) and may mean the cost is unaffordable, leading them to rely more on means-tested benefits in the future.’

Internet links: GOV.UK policy paper Low income tax group

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