Subject to certain conditions and limits, self-employed earners over the age of 16 and below state retirement age are currently entitled to pay both Class 2 and Class 4 National Insurance contributions (NICs) unless specifically excepted by provisions contained in the Social Security Contributions and Benefits Act 1992.
Class 4 contributions are calculated with reference to an individual’s income from self-employment, but Class 2 contributions are simply charged at a flat weekly rate – £2.95 per week in 2018/19 – where the individual’s self-employed income exceeds the ‘small profits threshold’ (SPT) for the year in question. For 2018/19 the SPT is £6,205, so anyone with profits above that limit should be entitled to pay the weekly Class 2 contribution.
It might be worth noting that for these purposes, ‘profits’ has the same meaning as given for Class 4 NICs, which broadly, means the charge is based on “all profits […] immediately derived from the carrying on or exercise of one or more trades, professions or vocations […] chargeable to income tax […] for the year of assessment and [which] are not profits of a trade, profession or vocation carried on wholly outside the UK”.
HMRC are responsible for administering Class 2 NICs, and liability to the charge is reported through self-assessment. This means that they can be paid together with income tax and Class 4 NICs in one go on the 31 January following the end of the relevant tax year.
Those that report profits below the SPT are not liable for Class 2 NICs, although they can usually pay voluntarily to protect their entitlement to contributory benefits.
So, what are the benefits of paying Class 2 contributions? In broad terms, they are the entry fee allowing the self-employed to enter the UK’s contributory benefits system. Payment will generally give the payer access to the following benefits, if and when the need arises:
- Maternity allowance
- Contribution-based employment and support allowance
- Widowed parent’s allowance
- Basic state pension
- New flat-rate state pension
- Bereavement benefits (except bereavement support payment)
- Bereavement support payment
Payment does not however, count towards contribution-based jobseeker’s allowance.
Government proposals to abolish Class 2 NICs and reform the system for paying Class 4 NICs were due to take effect from April 2019. The proposals were designed to simplify the tax system for the self-employed and offer them more equal access to contributory benefits. However, the Treasury subsequently announced that it will not be proceeding as planned with the abolition of Class 2 NICs – a move which is estimated will save some £360m for each of the three years to 2021 based on the original impact assessment.
There is, however, a good deal of speculation that NIC rates increases are likely in the near future, which are bound to affect employees and the self-employed alike.
As the current system stands, Class 4 NICs do not count towards any state benefits, but Class 2 contributions provide a cheap route for self-employed people to safeguard entitlement to a future state retirement pension and certain other state benefits. It may be possible to pay for gaps in a National Insurance record from the past 6 years. It’s therefore a good time to check that NIC payments are up-to-date and to take action where appropriate.