After much discussion and talk Class 2 National Insurance Contributions (NIC) for the self-employed will finally be abolished from 6 April 2019.
But how will state pension contributions be protected for the self-employed; in particular for those with losses or low profits? Will they have to pay more expensive Class 3 NIC contributions?
Changes to be made to Class 4 NIC
Based on the information currently available we understand that at the same time that Class 2 NIC is being abolished, changes will be made to Class 4 NIC which may be of assistance – but not in all cases. We have no legislation as yet and so the following comments are based on the information available but may be subject to change.
What is Class 2 NIC?
Class 2 NIC currently gives entitlement to State Pension, Maternity Allowance, Bereavement Benefits and the Employment & Support Allowance. From 6 April 2019, payment of Class 4 NIC will give entitlement to these benefits.
For 2018/19, Class 2 NIC is payable at £2.95 p.w. or £153.40 p.a. whereas Class 3 is payable at £14.65 p.w. or £761.80 p.a. Class 2 NIC is payable where profits exceed the “Small Profit Threshold” of £6,205 but the legislation allows the self-employed with profits below this to pay Class 2 NIC voluntarily.
Changes applying from 2019/20
From 2019/20 it has been announced that Class 2 NIC will be abolished but that for those self-employed persons with profits that fall between a new Class 4 NIC Small Profits Limit and the Class 4 NIC Lower Profits Limit will be deemed to have paid Class 4 NIC thereby giving the person a qualifying year for benefit entitlement purposes.
The Small Profits Limit will be set at 52 weeks x the Class 1 NIC Lower Earnings Limit – currently £116pw or £6,032pa.
Using 2018/19 rates, as an illustration, this gives the following effects:
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.
Who will be affected by the change?
As the question points out, it is not only those self-employed individuals with continuously low profits that will be affected but also those traders who occasionally make losses or whose profits occasionally fall below the new Small Profits Limit.
Consideration will need to be given to a particular individual’s contributory record for various benefits which will affect the decision whether to partially reduce available capital allowances claims to ensure profits reach the Small Profits Limit – something that will not be possible for those using the Cash Basis of assessment. It would also appear that the averaging of profits (available to farmers and creators of literary or artistic works) will add to the complications.