For self-employed workers, the way National Insurance Contributions (NICs) are paid will soon change.
Currently, eligible self-employed workers pay both Class 2 and Class 4 NICs. However, from 6 April 2018 Class 2 NICs will be abolished and Class 4 NICs will be reformed. Here we look at what the current responsibilities are of the self-employed when it comes to NICs and how this will change next April.
Class 2 NICs
Currently, Class 2 NICs are currently paid if you’re self-employed and over 16, until you reach State Pension Age.
Class 2 NICs are a fixed weekly amount. For the 2017/18 tax year you’ll pay £2.85 per week if your profits are above the Small Profits Threshold (£6,025 per year for 2017/18).
If you’re below the Small Profits Threshold it is not compulsory for you to pay Class 2 NICs, although you are able to pay them voluntarily if you wish to.
Although calculated at a weekly rate, if Class 2 NICs apply to you you’ll only pay them once a year when you submit your annual Self Assessment Return on the 31 January. Until their abolition, if liable you’ll pay these until the end of the tax year relevant to you. For example, Class 2 NICs for the 2017/18 tax year will be paid on the 31 January 2019, despite their abolition on 6 April 2018.
Class 4 NICs
Under the current system, self-employed workers will only need to pay Class 4 NICs if their income is above the Lower Profits Limit. For 2017/18 this is £8,164.
The amount of Class 4 NICs you’re liable for will depend on your profits. For those above the Lower Profits Limit there are two bands of profit, those who make an annual profit between £8,164 up to £45,000 and those who make a profit of above £45,000.
For those earning a profit between £8,164 and £45,000 their Class 4 NIC is calculated at 9%. For those who make a profit above £45,000 their Class 4 NICs are calculated at 2%.
For example, if you earn £10,000 for the 2017/18 tax year the first £8,164 will not be taxed, while the remaining £1,836 will be taxed at 9%. In this example, the total due would be £165.24.
What’s to come
The purpose of Class 2 NICs is so self-employed workers paying them qualify for State Pension. Once these are abolished the reformed Class 4 NICs will adjust to take over the responsibility of providing these contributory benefits.
However, it has not yet been announced the rate Class 4 NICs will change to. While it appears that the reformed version of Class 4 NICs will be similar to Class 1 NICs on an annual earning basis, there has been uncertainty over the rate.
It was well reported that the 9% rate of Class 4 NICs was planned to increase to 10% in 2018, then 11% in 2019. However, the government soon u-turned on this decision, announcing the rate would remain at 9% – although the certainty of this decision is yet to be revealed.
Will the changes to NICs affect you? Do you think the plans for reform will benefit the self-employed? Share your thoughts below.