Blog Abolition of Class 2 NIC

2 months ago

Author: PGM Accountants

Abolition of Class 2 NIC

Class 2 NIC

Working individuals pay National Insurance contributions to qualify for certain benefits and the State Pension.

There are different types of National Insurance (known as ‘Classes’). The class you pay depends on your employment status and how much you earn, and whether you have any gaps in your National Insurance record.

National Insurance class

Who pays

Class 1

Employees earning more than £162 a week and under State Pension age.  Class 1 NIC is automatically deducted by your employer

Class 1A or 1B

Paid directly by employers on their employees expenses or benefits

Class 2

Self-employed people earning more than £6,205 a year (voluntary contributions can be made)

Class 3

Voluntary contributions usually paid by individuals wishing to fill or avoid gaps in your National Insurance record

Class 4

Self-employed people earning profits over £8,424 a year

 

Self employed individuals earning £8,424 a year will pay both Class 2 and Class 4 NIC. 

Class 2 is payable at £2.95 per week (18/19) and Class 4 is payable at 9% on profits over £8,424 and 2% on profits exceeding £46,350 (18/19). Currently, Class 2 NIC gives entitlement to State Pension, Maternity Allowance, Bereavement Benefits and the Employment & Support Allowance. 

Class 4 NIC does not give entitlement to state benefits. Self employed individuals with profits below £6,205 often voluntarily pay Class 2 NIC to build a contribution record.

From 6 April 2019 Class 2 NIC is being abolished.

At the same time changes will be made to Class 4 NIC. There is no detailed legislation as yet and so the following comments are based on the information available but may be subject to change.

From 6 April 2019, payment of Class 4 NIC will give entitlement to state benefits. Using 2018/19 rates, as an illustration, the rates of NIC contributions will look as follows:

Profits below £6,032

No Class 4 NIC Payable

Profits between £6032 and £8,423

Class 4 NIC deemed to have been paid

Profits between £8,424 and £46,350

Class 4 NIC payable @ 9%

Excess of Profits over £46,350

Class 4 NIC payable @ 2%

The 2019/20 rates will of course differ but the principle involved is clear.

The reforms  to Class 4 NIC will be assistance in some cases but not all.  Some self-employed individuals will be given Class 4 credits (those with profits between £6,032 and £8,423) and will be treated as making contributions even though none are actually paid.

However, the biggest concern is for those with low profits or trader making losses as they will no longer be able to make voluntary Class 2 contributions or Class 4 contributions.  As such the only way that self-employed people on profits below the Class 4 threshold will be able to build up a contribution record will be by paying voluntary Class 3 contributions at £14.10 (18/19) a week.  This is significantly more expensive than voluntary Class 2 contributions (18/19: £2.95 per week).

Disclaimer

 

The information contained in this website is for guidance and information purposes only. It should not be relied upon as professional accounting, tax and legal advice.  For specific advice relevant to your own situation, always contact a professional.