The Government has announced that the planned abolition of Class 2 National Insurance will be delayed by one year to Saturday 6 April 2019.
The stated reason for the delay is the need for the Government to consult more fully in respect of the impact the abolition will have on lower earners.
What does the abolition of Class 2 National Insurance contributions mean?
Currently if you are self-employed and earn over £6,025 per annum you must pay Class 2 National Insurance contributions of £2.85 a week, which amounts to an annual cost of £148.20.
Contributions of Class 2 National Insurance qualify you for the basic State Pension and benefits such as Maternity Allowance and contribution-based Employment and Support Allowance.
If you earn less than £6,025 per annum you do not have to pay Class 2 National Insurance contributions but you do not then qualify for the benefits noted above. In order to qualify for those benefits it is possible to voluntarily make Class 2 National Insurance contributions.
In the Summer Budget 2015, it was announced that Class 2 National Insurance would be abolished from April 2018. The effect being that those earning over £6,025 per annum will still receive the credit for state benefits but will not need to make the contribution of £148.20 per annum. However, those earning less than £6,025 per annum who wish to qualify for the benefits would not be able to voluntarily pay Class 2 National Insurance contributions. They would instead need to voluntarily pay Class 3 National Insurance contributions which amount to £741 per annum, an increase of £592.80 per year.
What is the impact of the postponement?
If you are self-employed and earn more than £6,025 you will be worse off by £148.20 for the 2018/19 tax year than was expected. If you earn less than £6,025 and make voluntary contributions to obtain state benefits, you can continue to do so for the 2018/19 tax year by voluntarily making Class 2 National Insurance contributions, which is a saving of £592.80 than if you had instead had to make Class 3 National Insurance contributions.
The fact that the Government plans to look into this issue more closely is a welcome development, albeit a little late in the day.
What does this mean for Class 4 National Insurance contributions?
Class 4 National Insurance contributions are currently payable by the self-employed on profits over £8,164 per annum and carry no contributory benefits as they are a pure tax on profits. Reform of Class 4 National Insurance contributions has been consulted on in 2016 and whilst the retention of Class 2 National Insurance for a further year does not rule out any increases to Class 4 National Insurance being announced in the Autumn Budget on Wednesday 22 November, it would be a bold move given the backlash that was received from the previous attempt to increase National Insurance contributions.
Our Tax team will be keeping an eye on any further announcements on National Insurance in the run up to the Autumn Budget and be on hand throughout the day to answer all your questions.
Posted: November 6th, 2017