National Insurance Contributions For The Self-Employed: Where Are We Now?

Sarah Bradford takes a look at what the delay to the National Insurance Contributions Bill means for the self-employed.

It was all supposed to change from 6 April 2018. From that date, there was going to be a new National Insurance contributions (NICs) regime for the self-employed – Class 2 NICs was to go and Class 4 contributions were to be reformed to take on the role of building up entitlement to the state pension and contributory benefits. 

Everything seemed to be on target; there was a consultation back in late 2015/early 2016, followed by the publication of draft legislation in December 2016. Things started to unravel when the proposed Class 4 NICs rates were announced at the time of Spring Budget 2017 (a planned increase to 10% from April 2018, and to 11% from April 2019). 

Amid allegations of broken election promises and the imposition of a ’white van man tax’, the government were forced to make a speedy U-turn, announcing that the rate increases would not go ahead after all. Over the summer of 2017, it was all pretty quiet, but in early November 2017 came the announcement that the National Insurance Contributions Bill was delayed, and would not now be introduced to Parliament until 2018. As a result, the changes to NICs for the self-employed will now come into effect from April 2019 – one year later than planned.

So where does this leave the self-employed?

Under the current system, the self-employed pay two classes of NICs – Class 2 and Class 4 contributions. By contrast, employed earners pay a single class – Class 1 (although their employers may pay Class 1, Class 1A, and Class 1B NICs).

As far as the self-employed are concerned, Class 2 contributions are the ones that count for state pension and contributory benefit purposes, being the mechanism by which the self-employed build up their contributions record. They are payable by all self-employed earners whose profits from self-employment exceed the small profits limit. This is set at £6,025 for 2017/18. Class 2 contributions are payable for each week of self-employment at the rate of £2.85 per week for 2017/18. Although the rate is set weekly, the days of paying a weekly stamp are long gone, and Class 2 NICs are now payable annually through the self-assessment system and contributions for a year are due by 31 January after the end of the tax year. So, Class 2 contributions for 2017/18 are due by 31 January 2019. 

Where a self-employed person has profits below the small profits threshold they can, if they so wish, pay Class 2 contributions voluntarily. This is a cheap option compared to paying Class 3 (voluntary) contributions, the rate of which is £14.25 per week for 2017/18. 

The second class of contributions payable by the self-employed is Class 4 NICs. This does not confer any benefit entitlement and, as such, operates in the same way as a tax. Class 4 contributions are payable at the main rate, set at 9% for 2017/18, on profits between the lower profits limit and the upper profits limit; and at the additional rate of 2% on profits in excess of the upper profits limit. For 2017/18, the lower profits limit is £8,164, and the upper profits limit is £45,000.

Once the reforms are in place, the self-employed will only pay Class 4 contributions. Class 2 contributions are to be abolished (from April 2019, rather than from April 2018 as originally intended). Class 4 contributions are to be reformed from the same date, to provide the mechanism by which the self-employed build up entitlement to the state pension and certain contributory benefits. 

Once reformed, the Class 4 regime will not look exactly like it does now. In its revised form, it will follow a similar format to Class 1 contributions when operating on an annual basis. There will be a new limit – the small profits limit – which will be set at 52 times the lower earnings limit for Class 1 NICs purposes. On the basis of 2017/18 figures, in respect of which the lower earnings limit is £113 per week, the small profits limit would be £5,876. In keeping with the Class 1 NICs approach, under the new look Class 4 regime contributions will be payable at a zero rate between the new small profits threshold and the lower profits limit. As with Class 1 NICs, this will enable those whose profits fall within this band to build up entitlement to the state pension and to certain contributory benefits for zero contribution cost. 

Once profits reach the lower profits limit, Class 4 NICs will look pretty much as now – with contributions payable at the main rate between the lower profits limit and the upper profits limit, and at the additional rate on profits in excess of the upper profits limit. The big unknown is what the Class 4 contributions rates will be once the reforms come into effect. The plan to increase the main rate gradually, from the current level of 9%, first to 10% and then to 11% were put on hold following Spring Budget 2017. Whether the rate increases will be resurrected when the reforms eventually come into play remains to be seen.

The new look Class 4 regime will bring the NICs of the self-employed more closely into line with that for employed earners, laying the foundations for possible mergers (both within NICs and between tax and NICs) further down the line. 

The tax year 2018/19 was to have been the first year of the new regime, and should have seen the self-employed paying new-look Class 4 contributions only. However, this is not to be, and as far as NICs for the self-employed are concerned, 2018/19 looks much like 2017/18 – except with slightly different rates and thresholds.

The Class 2 regime lives on for at least another year, and for 2018/19 remains the means by which the self-employed can build up their contributions record. For 2018/19, the small profits limit is increased to £6,205 and the rate of Class 2 contribution to £2.95 per week.

The self-employed will also continue to pay Class 4 contributions, but they will continue to look much as they do now, except for the increase in the lower profits limit to £8,424 and the upper profits limit to £46,350. The main rate remains at 9% and the additional rate at 2%.

The delay is arguably good news for the self-employed whose profits are below the small profits threshold. This means that for another year they can continue to pay Class 2 contributions voluntarily at the ‘bargain price’ of £2.95 per week (rather than £14.65 per week for Class 3 contributions). However, the delay will cost those with profits between what will be the small profits limit (equivalent to £6,032 for 2018/19) and the lower profits limit of £8,424. Had the reforms gone ahead as planned, the self-employed with profits in this band would enjoy a qualifying year for state pension and benefit purposes, without actually having to pay any NICs.

The government has blamed the delay on needing time to consider the effect of the reforms on those with the smallest profits, who will be adversely affected by the changes. While this may be a factor, there may also be economic factors at play – having been forced to back down on the proposed increases to Class 4 NICs, it may simply be the case that the abolition of Class 2 NICs is no longer affordable. The plan at the moment is for the reforms to take effect from April 2019, but whether this actually happens may depend on whether, politically, it is possible to bring in the increase in the Class 4 contributions rate that is needed to balance the books. 

The self-employed with small earnings below the small profits threshold may wish to take advantage of the opportunity to pay Class 2 contributions voluntarily for another year.